Equivalent Annual Annuity
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Your firm has the opportunity to choose between the following two mutually exclusive projects:
Expected Net Cash Flows
Year Project S Project L
0 -500,000 -575,000
1 295,000 183,500
2 295,000 183,500
3 183,500
4 183,500
The projects provide a necessary service, so whichever project is selected that project is expected to be repeated into the foreseeable future. Both projects have a 10 percent cost of capital. Calculate the EAA for both projects and your rationale in selecting the best project.
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Solution Summary
This solution illustrates how to compute the equivalent annual annuity for two projects.
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