2.12 Sample Problem: NPV and AAA for Unequal Lives
Given:
- WACC (weighted average cost of capital; discount rate) = 0.08
- Cash flows projections as below – on the next page
- The projects are mutually exclusive
- Note: the projects have different expected lives
To Solve:
- Calculate the NPV for both projects, using the given unequal lives.
- Re-calculate the NPV for Project B, assuming that it is replicable as initially projected.
- Calculate the AAA for both projects.
- Based on the numbers calculated, which project would you choose?
Note:
This example is derived from: http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/comparing-projects-unequal-lives.asp. Thanks to Chaim Halberstam and Ariel Dorfman (The Lander College for Men class of 2019) for re-working the numbers to suit pedagogical requirements.