Doering Computers is considering two mutually exclusive projects. Their cash flows are shown below: tProj. A Cash FlowsProj. B Cash Flows
0-$500-$700
1200 250
2400 475
3100 125
4----225
The company's cost of capital (WACC) is 10 percent. Each of the projects can be repeated. What is the equivalent annual annuity (EAA) of the project, which adds the most to shareholder value?
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A. B. C. D. E.B
Find NPV of each project.
NPV(A) = $87.5282.
NPV(B) = $167.4271.
Find EAA:
For Project A:
N = 3; I = 10; PV = -87.5282; FV = 0; solve for PMT = EAA = $35.1964.
For Project B:
N = 4; I = 10; PV = -167.4271; FV = 0; solve for PMT = EAA = $52.8184.