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    Equivalent Annual Annuity

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    You are considering the following 2 mutually exclusive projects. Using the equivalent annual annuity method and a cost of capital of 10%, which project should be selected. (Round to nearest $)

    Project A Project B
    Year Cash Flow Cash Flow
    0 (20,000) (20,000)
    1 15,000 5,000
    2 20,000 10,000
    3 15,000
    4 50,000

    a. Project B because of an EAA of $12,060
    b. Project A because of an EAA of $5,857
    c. Project B because of an EAA of $38,320
    d. Project A because of an EAA of $10,165

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    Solution Preview

    Please see the attached file. In finding the equivalent annuity, we first find the NPV of the projects. Given the discount rate we find the NPV. This NPV is now converted to equivalent annuity. The equivalent annuity is an annuity the present value of which ...

    Solution Summary

    The solution explains the use of equivalent annuity method to choose between mutually exclusive projects.