Atlas Corp is considering two mutually exclusive projects. Both requir

QUESTION

Atlas Corp is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t=0. Project S has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,000 at the end of Years 1 and 2, respectively. Project L has an expected life of 4 years with after-¦
PV of project S: NPV = -10,000 6,000/1.1075 8,000/1.1075^2 NPV = 1,939.93 Since this project can be performed twice we know that the PV of the first project in year 0 is 1,939.93 and this will also be the PV in year 2 (start of the second round) this value has to be discounted back to now. NPVs = 1,939.93 1,939.93/1.1075^2¦

= 1,939.93 1,581.60 = 3,521.53 PV of project L NPV = -10,000 4,373/1.1075 4,373/1.1075^2 4,373/1.1075^3 4,373/1.1075^4 NPV = 3,639.73 So project L is the better choice. Gain of L over S = 3,639.73 “ 3,521.53 = 118.20

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