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    Computing the Equivalent Annual Annuity (Cost)

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    1. Gateway Tours is choosing between two bus models. One is more expensive to purchase and maintain but lasts much longer than the other. Its discount rate is 11.2%. The company plans to continue with one of the two models for the foreseeable future. Based on the costs of each shown below, which should it choose? (Note: dollar amounts are in thousands.)
    Model: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
    Old Reliable — $201 — $4.2 — $4.2 — $4.2 — $4.2 — $4.2 — $4.2 — $4.2
    Short and Sweet —$99 —$1.9 —$1.9 —$1.9 —$1.9
    Based on the costs of each model, which should it choose? (Select the best choice below.)

    A. Gateway Tours should choose Old Reliable because it lasts longer.
    B. Gateway Tours should choose Short and Sweet because the equivalent annual annuity of its costs is smaller.
    C. Gateway Tours should choose Short and Sweet because the NPV of its costs is smaller.
    D. Gateway Tours should choose Old Reliable because the equivalent annual annuity of its costs is smaller.

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    https://brainmass.com/business/dividends-stock-repurchase-and-policy/computing-equivalent-annual-annuity-cost-620084

    Solution Summary

    This solution illustrates how to use Excel functions to compute the net present value (cost) of a project and the equivalent annual annuity (cost) of projects with uneven lives.

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