The Meacham Tire Company is considering two mutually exclusive projects with useful lives of 3 and 6 years

The after-tax cash flows for projects S and L are listed below.

Year Cash Flow S Cash Flow L
0 -$60,000 -$115,000
1 38,000 28,500
2 25,000 49,500
3 35,000 26,850
4 22,600
5 18,750
6 23,500
The required rate of return on these projects is 14 percent. What decision should be made? As part of your
answer, calculate the NPV assuming a replacement chain for Project S, and also calculate the equivalent annual
annuity for each project.

Accept Project S because its replacement chain NPV of $1,999.96 is positive and is greater than the NPV of Project L of
$1,237.09. Also, the equivalent annual annuity for Project S is $514.30 while that of Project L is only $318.13.