Question

Project X and Project Y are two mutually exclusive projects. Project X requires an initial outlay of $38,000 and generates a net cash flow of $14,000 per year for six years. Project Y requires an initial outlay of $52,000, and will generate cash flows of $15,300 per year for eight years. Which project should be chosen and why? (Assume that the discount rate for both projects is 10 percent).

		A.  Project X because Project X has a larger NPV than Project Y.
		B.  Project Y because Project Y has a larger NPV than Project X.
		C.  Project Y because Project Y has a larger Equivalent Annual Series than Project X.
		D.  Project X because Project X has a larger Equivalent Annual Series than Project Y.
		E.  Both projects X and Y because both projects have positive NPV.

Answer 1

equivalent annual cash flow for X = (initial investment/PVAF )-annual cash inflow	(-38000/4.3552)+14000	5274.79794
equivalent annual cash flow for Y = (initial investment/PVAF )-annual cash inflow	(-52000/5.3349)+15300	5552.86322
NPV of Equivalent annual cash flow of X = equivalent annual cash flow*PVAF at 10% for 6 Years	5274.9195*4.3552	22973.3294
NPV of Equivalent annual cash flow of Y = equivalent annual cash flow*PVAF at 10% for 6 Years	5552.911*4.3552	24184.038
Answer is B	Project Y as it NPV of equivalent cash flow is more than Project X
PVAF at 10% for 6 Years	1-(1+r)^-n / r	1-(1.1)^-6 / .10	4.3552
PVAF at 10% for 8 Years	1-(1+r)^-n / r	1-(1.1)^-8 / .10	5.3349