2.14 NPV and AAA for Unequal Lives (Solutions) (59/92) -- Corporate Finance

2.14 NPV and AAA for Unequal Lives (Solutions) Solution: ($ Millions) | Machine A | Machine B | ||| | Year | Cash Flows | Discounted Cash Flow | Cash Flows | Discounted Cash Flow | | 0 | ($10,000) | ($10,000) | ($5,000) | ($5,000) | | 1 | 2,000 | 1,852 | 1,750 | 1,620 | | 2 | 3,500 | 3,001 | 3,250 | 2,786 | | 3 | 3,250 | 2,580 | 3,000 | 2,381 | | NPV | 1,787 | | 3 | ($5,000) | (3,969) | || | 4 | 3,000 | 2,205 | 1,750 | 1,286 | | 5 | 2,750 | 1,872 | 3,250 | 2,212 | | 6 | 2,500 | 1,575 | 3,000 | 1,891 | | NPV | 3,085 | 3,207 | || | AAA | 667.33 | 693.72 | The table below summarizes the data. | Project A | Project B – 3 Years | Project B – 6 Years | Decision Choice | | | NPV | 3,085 | 1,787 | A | | | 3,207 | B | ||| | AAA | 667.33 | 693.72 | B | On an NPV basis, project A is favored when compared to project B, if assumed that B is non-replicable. When assuming equal lives, by replicating Project B, both NPV and AAA favor B.