Ziadat, Inc. is considering Project A and Project B, which are two mutually excl

Question

Ziadat, Inc. is considering Project A and Project B, which are two mutually exclusively projects with unequal lives. Project A is an eight-year project that has an initial outlay or cost of $140,000. Its future cash inflows for years 1 through 8 are the same at $36,500. Project B is a six-year project that has an initial outlay or cost of $160,000. Its future cash inflows for years 1 through 6 are the same at $48,000. Ziadat uses the equivalent annual annuity (EAA) method and has a discount rate of 13%. Which project(s), if any, will Ziadat accept?

Explanation / Answer

for first project

Year Cashflow Present Value 0 -140000 -140000 1 36500 32300.88 2 36500 28584.85 3 36500 25296.33 4 36500 22386.13 5 36500 19810.74 6 36500 17531.63 7 36500 15514.71 8 36500 13729.83 NPV 35155.12

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