Question

Eagle Fly Co. is considering two mutually exclusive projects. Project A has an up-front cost of $260,000 (CF0 = -260,000), and produces positive after-tax cash inflows of $64,000 a year at the end of each of the next six years. Project B has an up-front cost of $190,000(CF0 = -190,000) and produces after-tax cash inflows of $64,500 a year at the end of the next four years. Assuming the cost of capital is 10.5%,

1. Compute the equivalent annual annuity of project A in box 1. Round the EAA to a whole dollar without the dollar sign or comma, e.g., 3452 (non-negative number)

2. Compute the equivalent annual annity of project B in box 2. The same format as box 1.

3. Decide which project to undertake in box 3, either Project A or Project B.

Answer 1