In: Finance
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%.
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.