Question

You are considering the following 2 mutually exclusive projects. Using the equivalent annual annuity method and a cost of capital of 10%, which project should be selected? (Round to nearest $) Project A Project B Year Cash Flow Cash Flow 0 (20,000) (20,000) 1 15,000 5,000 2 20,000 10,000 3 15,000 4 50,000

Answer 1

	i	ii		iii	iv=i*iii	v=ii*iii
	Cash flow				Present value
year	Project A	Project B		PVIF @ 10%	Project A	Project B
0	-20000	-20000		1.0000	(20,000.00)	(20,000.00)
1	15000	5000		0.9091	13,636.36	4,545.45
2	20000	10000		0.8264	16,528.93	8,264.46
3	15000	50000		0.7513	11,269.72	37,565.74
NPV					21,435.01	30,375.66
Computation of equivalent annual annuity
we have to use financial calculator to compute equal annual annuity
Put in calculator
		Project A		Project B
PV		(21,435.01)		(30,375.66)
FV		0		0
I		10%		10%
N		3		3
Compute PMT		$8,619.34		12,214.50
therefore EAA project A =			$8,619.34
	EAA project B =		12,214.50
Projet B will be preferred over project A