Question

1. The equivalent annual annuity method involves calculating the annual payment amount that a particular project would provide if it were an annuity. When comparing projects of unequal lives, the one with the higher equivalent annual annuity should be chosen.  

a. True           b. False

2. Mutually exclusive projects sometimes have long and different lives which makes applying the replacement chain method difficult because the lowest common denominator is very large. The equivalent annual annuity is a substitute method which uses the annuity concept to value a project's cash flows.  

a. True           b. False

3. The equivalent annual annuity (EAA) approach assumes continuous replacements can and will be made each time the asset's life ends.  

a. True           b. False

4. Extending projects with different lives to a common life for comparison purposes, while theoretically appealing, should be done only if there is a high probability that the projects will actually be replicated beyond their initial lives.  

a. True           b. False

Answer 1

1. TRUE: The equivalent annual annuity method involves calculating the annual payment amount that a particular project would provide if it were an annuity. When comparing projects of unequal lives, the one with the higher equivalent annual annuity should be chosen.

2. TRUE : Mutually exclusive projects sometimes have long and different lives which makes applying the replacement chain method difficult because the lowest common denominator is very large. The equivalent annual annuity is a substitute method which uses the annuity concept to value a project's cash flows.

3. TRUE: The equivalent annual annuity (EAA) approach assumes continuous replacements can and will be made each time the asset's life ends.

4. TRUE: Extending projects with different lives to a common life for comparison purposes, while theoretically appealing, should be done only if there is a high probability that the projects will actually be replicated beyond their initial lives.