Atlas Corp is considering two mutually exclusive projects Bo

Atlas Corp. is considering two mutually exclusive projects. Both require an initial investment of $11,500 att-O. Project S has an expected life of 2 years with after-tax cash inflows of $5,800 and $7,700 at the end of Years 1 and 2, respectively. Project L has an expected life of 4 years with after-tax cash inflows of $4,136 at the end of each of the next 4 years. Each project has a WACC of 9.25%, and Project S can be repeated with no changes in its cash flows. The controller prefers Project S, but the CFO prefers Project L. How much value will the firm gain or lose if Project L is selected over Project S, i.e., what is the value of NPVL - NPVs when replacement chain method is applied (both have 4 years life then)? A) $1,064.93 B) $1,562.23 C) $1,321.06 D) $478 E) $367

Solution

The Diffrence of the NPV of both projects are =

1826.28 - 260.233 = 1566.048

that means the answer (B) is correct , the difference is due to rounding off or decimal places values

	Project S				Project L
Stage	Cash Flow	PVF@ 9.25%	PV		Stage	Cash Flow	PVF@ 9.25%	PV
0	-11500	1	-11500		0	-11500	1	-11500
1	5800	0.915	5308.924		1	4136	0.915	3785.812
2	7700	0.838	6451.309		2	4136	0.838	3465.274
	NPV		260.2333		3	4136	0.767	3171.876
					4	4136	0.702	2903.319
								1826.282