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What is the EAC of two projects: project A, which costs $150 and is expected to...

What is the EAC of two projects: project A, which costs $150 and is expected to last two years, and project B, which costs $190 and is expected to last three years? The cost of capital is 12%.

Solutions

Expert Solution

EAC = Asset price x Discount rate/ [1-(1+Discount rate)-number of periods]

EAC for Project A = $ 150 x 0.12/ [1-(1+0.12)-2]

                                = $ 18/ [1-(1.12)-2]

                                = $ 18/ (1-0.79719387755102)

                                = $ 18/ 0.20280612244898

                                = $ 88.754716981132 or $ 88.75

EAC for Project B = $ 190 x 0.12/ [1-(1+0.12)-3]

                                = $ 22.8/ [1-(1.12)-3]

                                = $ 22.8/ (1- 0.71178024781341)

                                = $ 22.8/ 0.28821975218659

                                = $ 79.1063063063063 or $ 79.11

Project B is preferable as EAC for Project B is less than Project A.

jeff jeffy answered 2 years ago
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