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    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.