Question

A firm needs to estimate the Equivalent Annual Annuity (EAA) of two projects can be repeated indefinitiley. Project X requires an intial investment of 46,000 today and is expected to generate annual cash flows of 12,000 for the next 24 years. Project Y requirs an initial investment of 170,000 and is expected to generate monthly cash flows of 2,800 for the next 10 years. The cost of capital is 12%. The ____ has the highest EAA, which is ____ A.) Project Y; 6,091 B.) Project X; 6,639 C.) Project Y; 4,453 D.) Project X; 4,854 E.) Project X; 6,091

Answer 1

Project X

PMT = 12,000, N = 24, FV = 0, rate = 12%

use PV function in Excel

present value of inflows = 93,412

NPV = 93,412 - 46,000 = 47,412

PV = 47,412, rate = 12%, FV = 0, N = 24

use PMT function in Excel

EAA = 6091

Project Y

PMT = 2,800, N = 120, FV = 0, rate = 12%/12

use PV function in Excel

present value of inflows = 195,161

NPV = 195,161 - 170000 = 25,161

PV = 25,161, rate = 12%, FV = 0, N = 10

use PMT function in Excel

EAA = 4453

ans: E.) Project X; 6,091