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-tax cash inflows of $4,373 at the end of each of the next 4 years. each project has a wacc of 9.25%, and project s can be repeated with no changes in its cash flows. the controller prefers project s, but the cfo prefers project l. how much value will the firm gain or lose if project l is selected over project s, i.e., what is the value of npvl - npvs?

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Parrain Parrain · Answer 1 · 2022-05-06T14:51:00+02:00

Based on the after-tax cashflows of each project, the value that the firm will gain if Project L is selected over Project S is $56.50.

Project L net present value:

= Present value of inflows - Outflows

= 4,373/1.10925 + 4,373/1.10925² + 4,373/1.10925 ³ + 4,373/1.10925 ⁴ - 10,000

= 14,089.90 - 10,000

= $4,089.90

Project S net present value:

Because project s can be repeated after it is done, the net present value will be:

= (6,000/1.0925 + 8,000/1.0925² - 10,000) + ((6,000/1.0925 + 8,000/1.0925² - 10,000) / 1.0925²)

= $4,033.40

The difference is:

= Project L - Project S

= $56.50

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