King Racing Company (KRC) Is Considering Which of Two Mutually

Multiple Choice

King Racing Company (KRC) is considering which of two mutually exclusive engine development projects to pursue. King's RPX design has an expected life of 4 years and projected cash inflows are $3.6 million at the end of each of the first two years and $1.8 million in each of the next two years. King's RPB design is more flexible and has an eight-year life. The projected end-of-year flows from the RPB design are $2.4 million in each of the first two years and $2.0 million in each of the next six years. Both projects require an initial investment of $5.4 million, and King's cost of capital is 12 percent. Frequent changes in racing rules and engine technology make engine development risky, but King feels that the basic designs can be refined and modified. Thus, King often assumes that continuous replacements can be made as a project's life ends. What is the net present value (on an eight-year extended basis) of the project with the most value to the company?

A) $ 3.109 million
B) $ 1.976 million
C) $ 5.085 million
D) $ 5.211 million
E) $ 6.218 million