Your company is considering two mutually exclusive projects. Project A has an initial capital investment of R1 billion, and Project B has an initial investment of R1.5 billion. Project A has an expected life of 5 years with after-tax cash inflows of R400 million, each year for the next 5 years. Project B has an expected life of 10 years with after-tax cash inflows of R350 million, each year for the next 10 years. The companyâ€™s WACC for project A is 10% and 12% for project B Required: 2.1. If the projects cannot be repeated, which project should be selected if the company uses NPV as its criterion for project selection? (6) 2.2. Assume that the projects can be repeated and that there are no anticipated changes in the cash flows. Use the replacement chain analysis to determine the NPV of the project selected. Which project should be accepted? (4) 2.3. Make the same assumptions as in part 2.2. Using the equivalent annual annuity (EAA) method, what is the EAA of the project selected? Assuming NPV for infinite life, which project should be acceptable?
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