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21) What a safe method to use when confronted with
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Question : 21) What a safe method to use when confronted with : 1908994

21) What is a safe method to use when confronted with mutually exclusive projects?

8.5   Evaluating Projects with Different Lives

1) You can evaluate alternative projects with different lives by calculating and comparing their equivalent annual annuity.

2) When using equivalent annual annuities to compare the costs of projects with different lives, you should not consider any changes in the expected replacement cost of equipment.

3) When comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV) to the net present value (NPV)?

A) so that you can see which project has the greatest net present value (NPV)

B) so that the projects can be compared on their cost or value created per year

C) to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe

D) to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered

4) A janitorial services firm is considering two brands of industrial vacuum cleaners to equip their staff. Option A will cost \$1500, will require servicing of \$200 per year, and last five years. Option B will cost \$1000, require servicing of \$100 per year, and last three years. If the cost of capital is 8%, which is the better option, given that the firm has an ongoing requirement for vacuum cleaners?

A) Option A, since it has a lower equivalent annual annuity.

B) Option B, since it has a lower equivalent annual annuity.

C) Option A, since it has a greater equivalent annual annuity.

D) Option B, since it has a greater equivalent annual annuity.

5) A garage is comparing the cost of buying two different car hoists. Hoist A will cost \$20,000, will require servicing of \$1000 every two years, and last ten years. Hoist B will cost \$15,000, require servicing of \$800 per year, and last eight years. If the cost of capital is 7%, which is the better option, given that the firm has an ongoing requirement for a hoist?

A) Hoist A, since it has a greater present value (PV).

B) Hoist B, since it has a greater present value (PV).

C) Hoist A, since it has a greater equivalent annual annuity.

D) Hoist B, since it has a greater equivalent annual annuity.

6) A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of \$50,000 and additional payments of \$20,000 per year. What is the equivalent annual annuity of this deal, given a cost of capital of 6%?

A) -\$14,720

B) -\$19,720

C) -\$20,000

D) -\$26,793

7) An company buys a color printer that will cost \$18,000 to buy, and last 5 years. It is assumed that it will require servicing costing \$500 each year. What is the equivalent annual annuity of this deal, given a cost of capital of 12%?

A) -\$3983

B) -\$4002

C) -\$4957

D) -\$5493

8) A lawn maintenance company compares two ride-on mowers?the Excelsior, which has an expected working-life of six years, and the Grassassinator, which has a working life of four years. After examining the equivalent annual annuities of each mower, the company decides to purchase the Excelsior. Which of the following, if true, would be most likely to make them change that decision?

A) Fuel prices are expected to rise and raise the annual running costs of all mowers.

B) The mower is only expected to be needed for three years.

C) The prices of equivalent mowers are expected to grow in the future as lawnmower manufacturers consolidate.

D) The number of customers requiring lawn-mowing services is expected to sharply increase in the near future.

9) Jenkins Security has learned that a rival has offered to supply a parking garage with security for ten years for \$50,000 up front and a further \$20,000 per year. If Jenkins Security offers to provide security for eight years for an upfront cost of \$70,000 and a separate yearly payment, what is the maximum that this yearly payment can be so that Jenkins' offer matches the equivalent annual annuity of their rival's offer? (Assume a cost of capital of 6%.)

A) \$13,095

B) \$13,458

C) \$13,995

D) \$15,521

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