A company is considering two mutually exclusive projects. Both require an initia

Question

A company is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $7,900 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $4,300 at the end of each of the next 4 years. Each project has a cost of capital 8%.

A) Find the EAA for project X.

B) Find the EAA for project Y.

Any hints/suggestions are welcome.

Thank you!!! :)

Explanation / Answer

Project-X is better as the EAA is higher.

Particulars/Year 0 1 2 3 4 Project-X -10000 6000 7900 PV@8% -10000 5555.56 6773 NPV=sum of the cash flow 2328.5 Annuity(A,N=2 Years,I=8%)= A*1.7833=2328.5 or A=EAA=2328.5/1.7833 1305.7 Project-Y -10000 4300 4300 4300 4300 PV@8% -10000 3981.48 3686.6 3413.5 3160.6 NPV=sum of the cash flow 4242.1 Annuity(A,N=4,I=8%) A*3.3121=4242.1 or A=EAA=4242.1/3.3121 1280.8

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