e initial investment as well as differing lives Assume a 10 pa discount rate

E initial investment as well as differing lives

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Clearly, the three projects have different scale (i.e., initial investment), as well as differing lives. Assume a 10% p.a. discount rate applies to all projects. a) Assume that the projects will be repeated indefinitely. That is, Project A is repeated every two years, Project B is repeated every four years, and so on. Which project will you accept? b) If the assumption that the projects can be repeated is invalid, which project will you accept? c) Now just consider Projects A and B. Presumably in Part (a) you calculated annual equivalent annuities. We will get the same decision if we just assume Project A is repeated once at the end of its two-year life. Schedule the cash flows for Project A if it runs two cycles, calculate the NPV and compare it to Project B's NPV. Confirm that your ranking of projects in (a) is correct. (If you are keen, you might do the same for A, B and C. That is, assume A is repeated 10 times, B is repeated 5 times, and C is repeated 4 times. Thus, you are equating projects over a 20-year horizon.) 13. Your office is about to purchase a new machine at a cost of $64,000. You have forecast the following data relating to salvage value and operating costs over the next five years: YEAR SALVAGE VALUE AT THE END OF THE YEAR ($) ANNUAL CASH OPERATING EXPENSES ($) 1 50,000 11,000 2 40,000 13,000 3 30,000 18,000 4 23,000 24,000 5 3,500 28,000
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5 If the machine is replaced every two years, $11,000 in expenses are incurred in year one and $13,000 in year two, and so on. The required rate of return is 15% p.a. The effects of company tax may be ignored (i.e., there is no need to calculate depreciation). What is the optimum replacement policy for this machine? That is, should the office replace the machine every year, or every two years, or what?
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