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Question
The Meacham Tire Company is considering two mutually exclusive projects with useful lives of 3 and 6 years. The after-tax cash flows for projects S and L are listed below.| Year | Cash Flow S | Cash Flow L |
| 0 | -$60,000 | -$115,000 |
| 1 | 38,000 | 28,500 |
| 2 | 25,000 | 49,500 |
| 3 | 35,000 | 26,850 |
| 4 | 22,600 | |
| 5 | 18,750 | |
| 6 | 23,500 |
The required rate of return on these projects is 14 percent. What decision should be made? As part of your answer, calculate the NPV assuming a replacement chain for Project S, and also calculate the equivalent annual annuity for each project.
Answer
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