Equivalent Annual Annuity (EAA) of Best Project | CFA® Level 1 Exam Prep

Calculate the Equivalent Annual Annuity (EAA) of the Best Project

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Projects A and B are mutually exclusive and will be repeated. The company's cost of capital is 12.5 percent. tProj. A-Cash FlowsProj. B-Cash Flows

0- 10,000- 10,000

1+ 40,000+ 30,000

2+ 50,000+ 30,000

3+ 30,000+ 30,000

4+ 20,000+ 30,000

5+ 30,000

What is the equivalent annual annuity (EAA) of the best project?

A. $24,227

B. $27,192

C. $32,811

D. $23,243

E. $35,000 C

Click on the arrows to vote for the correct answer

A. B. C. D. E.

Explanation

First find the NPV of each project, using the cash flow register:

Project A NPV = $98,617.59.

Project B NPV = $96,817.05.

Then find EAA:

Project A:

N = 4; I = 12.5; PV = -98,617.59; FV = 0; solve for PMT = $32,810.85.

Project B:

N = 5; I = 12.5; PV = -96,817.05; FV = 0; solve for PMT = $27,191.46.

Project A has the higher EA -

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