Lithium,Inc

question 123

Multiple Choice

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.Which project would you recommend using the replacement chain method to evaluate the projects with different lives?

• A) Project B because its NPV is higher than Project A's replacement chain NPV of $47,623
• B) Project A because its replacement chain NPV is $76,652, which exceeds the NPV for Project B
• C) Project A because its replacement chain NPV is $45,642, which is less than the NPV for Project B
• D) Both projects will be valued the same since they are now both four year projects.

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