Question

Your firm is considering two projects. Your boss asked you to use the Equivalent Annual Annuity...

Your firm is considering two projects. Your boss asked you to use the Equivalent Annual Annuity method. Project A has an expected life of seven years, will cost $50,000,000, and will produce net cash flows of $12,000,000 each year. Project B has a life of fourteen years, will cost $60,000,000, and will produce net cash flows of $10,000,000 each year. The firm’s cost of capital is 12%. What is the equivalent annual annuity for each project? Which project should the firm accept? Show your full work.

CAN YOU SHOW STEPS

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

NPV = Present value of cash inflows - Presnet value of cash outflows

Equivalent Annual Annuity = NPV/Present value Annuity factor

Project A, NPV = -50,000,000 + 12,000,000*PVAF(12%, 7 years)

= -50,000,000 + 12,000,000*4.5638

= $4,765,600

EAA = 4,756,600/4.5638 = $1,044,217.54

Project B. NPV = -60,000,000 +10,000,000*PVAF(12%, 14 years)

= -60,000,000 + 10,000,000*6.6282

= $6,282,000

EAA = 6,282,000/6.6282

= $947,768.62

Hence, project A is better since higher EAA

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A firm needs to estimate the equivalent annual annuity (EAA) of two projects, since these projects...
A firm needs to estimate the equivalent annual annuity (EAA) of two projects, since these projects can be repeated indefinitely. Project X requires an intial investment of 31,000 today and is expected to generate annual cash flows of 11,000 for the next 21 years. Project Y requires an intial investment of 120,000 and is expected to generate monthly cash flows of 1,800 for the next 15 years. The cost of capital is 10%. The ____ has the highest EAA, which...
Suppose you are faced with choosing between two mutually exclusive projects. Your boss asked you to...
Suppose you are faced with choosing between two mutually exclusive projects. Your boss asked you to use the Replacement Chain method. The first project offers cash flows of $15,000 in years one and two, and $20,000 in years three, four, and five. It has an initial cost of $25,000. The second project offers cash flows of $25,000 per year for four years, and then $45,000 per year for six additional years (total project life of 10 years). It has an...
A firm needs to estimate the Equivalent Annual Annuity (EAA) of two projects can be repeated...
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.)...
14) A firm needs to estimate the equivilent annual annuity (EAA) of two projects, since these...
14) A firm needs to estimate the equivilent annual annuity (EAA) of two projects, since these projects can be repeated indefinitely. Project X requires an initial investment of $41,000 today and is expected to generate annual cash flows of $12,000 for the next 26 years. Project Y requires an initial investment of $200,000 and is expected to generate monthly cash flows of $2,900 for the next 13 years. The cost of capital is 7%. The _____ has the highest EAA,...
Your firm is trying to decide between two different projects. Your boss has asked you to...
Your firm is trying to decide between two different projects. Your boss has asked you to use the MIRR criteria at the cost of capital of 13%. Which of these projects will you choose? CAN YOU SHOW STEPS Year Poject A Project B 0 -100,000 -75,000 1 125,000 15,000 2 100,000 50,000 3 75,000 75,000 4 50,000 100,000 5 15,000 150,000
Question 11 Your firm is considering the adoption of two new projects. However, due to rationing...
Question 11 Your firm is considering the adoption of two new projects. However, due to rationing requirements, only one can be chosen. Your boss informs you that the decision will be made based on which project provides the best Equivalent Annual Annuity, as it is assumed that each project can be rolled over upon completion. Given the information provided below, calculate the EAA for both projects and identify which should be chosen. Both projects have a required return of 13%....
Fairland Enterprises, Inc. is considering two mutually exclusive projects, A and B. This project is mandated...
Fairland Enterprises, Inc. is considering two mutually exclusive projects, A and B. This project is mandated by state regulatory law to ensure employee safety in the firm’s production facility. Each of these projects generates no cash inflows. Instead, annual operating costs will be incurred to operate each project as per the information provided in the following table: Project A Project B Initial Investment at t = 0 ($20,000) ($30,000) Project Life 3 years 4 years Annual Operating Cost ($7,000) ($10,000)...
Your division is considering two investment projects, each of which requires an up-front expenditure of $15...
Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows: Year Project A Project B 1 $ 5,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 6,000,000 What are the two projects' NPVs, assuming the cost of capital is 5%? Project A: $    Project B: $    What are the two projects' NPVs, assuming the cost of capital is 10%? Project A: $    Project...
7. Your division is considering two investment projects, each of which requires an up-front expenditure of...
7. Your division is considering two investment projects, each of which requires an up-front expenditure of $17 million. You estimate that the investments will produce the following net cash flows: Year Project A Project B 1 $ 4,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 6,000,000 What are the two projects' net present values, assuming the cost of capital is 5%? Do not round intermediate calculations. Round your answers to the nearest dollar. Project A: $__ Project B: $__ What are...
A firm is evaluating an 8-year project that costs $200,000 and has annual net cash flows...
A firm is evaluating an 8-year project that costs $200,000 and has annual net cash flows of $50,000 per year. The firm’s cost of capital is 13%. What is the equivalent annual annuity of the project ? $4,992 $41,677 $8,323 $39,939 $91,677
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT