Question

In: Finance

Project A has the following cash flows: Year CF: -40,000, 8,000, 14,000, 13,000, 12,000, 11,000, and...

Project A has the following cash flows: Year CF: -40,000, 8,000, 14,000, 13,000, 12,000, 11,000, and 10,000.

Project B has the following cash flows: Year CF: -20,000, 7,000, 13,000, and 12,000.

Assuming that the required rate is 12%, what is the Equivalent Annual Annuity (EAA) for the two projects? Based on the EAA, which project is better?

Expert Solution

	12.0000%
Cash flows	Year	Discounted CF
(40,000.00)	0	-40000.00
8,000.00	1	7142.86
14,000.00	2	11160.71
13,000.00	3	9253.14
12,000.00	4	7626.22
11,000.00	5	6241.70
10,000.00	6	5066.31

PV = 6490.94

FV = 0

rate = 12%

N = 6

use PMT function in Excel

EAA of A = 1,578.76

B:

	12.0000%
Cash flows	Year	Discounted CF
(20,000.00)	0	-20000.00
7,000.00	1	6250.00
13,000.00	2	10363.52
12,000.00	3	8541.36

PV of B =5154.88

FV = 0

rate = 12%

N = 3

use PMT funciton

EAA of B = 2146.23

so B is better

jeff jeffy answered 2 years ago

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