Question

You are trying to determine which of two mutually exclusive projects to undertake. Project Adam has an initial outlay of $10,000, an NPV of $4,392.15, an IRR of 11.33%, and an EAA of $1,158.64. Project Eve has an initial outlay of $15,000, an NPV of $5,833.73, an IRR of 9.88%, and an EAA of $1,093.50. The cost of capital for both projects is 9%, and the projects have different lives. If the projects are repeatable, then:

You should do both projects because they have positive NPVs.

You should do Project Adam because it has a higher EAA.

You should do Project Eve because it has a higher NPV.

You should do Project Adam because it has a higher IRR.

You should do neither projects since neither of them adds value to you.

Answer 1

According to net present value and internal rate of return, both the project has to be accepted but when we are adopting the equivalent annual annuity, then it can be seen that project Adam will be having a higher equivalent annual annuity and it will mean that this project Adam isis using the resources efficiently and it has to be selected because it will have the higher EAA.

So it can be said that project Adam should be selected because of higher EAA

Rest of the options are not reflective of the true scenarios.

Correct answer will be option ( B)You should do Project Adam because it has a higher EAA