Homework Answers
In case of projects with unequal life, the right meaure to compare the projects is not NPV but equivalent annual benefit
NPV of project A = 1,800*PVF(8%, 1 year) + 1,700*PVF(8%, 2 years) + 3,200*PVF(8%, 3 years)-5,000
= 1,800* 0.926+1700*0.857+3200*0.794-5,000
=$664.5
EAA = NPV/PVAF(8%, 3 years)
= $257.81
NPV of project B = 1200*0.926+1280*0.857+1350*0.794+1400*0.735+2200*0.681 - 5,000
=$806.5
EAA = NPV/PVAF(8%, 5 years)
=$201.99
Since EAA of project A is higher, it should be selected
The correct answer is C.
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