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Given the following cash flows for two mutually exclusive projects, and a required rate of return of 12%, what is the EAA for Project A? Year Project A Project B 0 -300,000 -300,000 1 150,000 70,000 2 150,000 70,000 3 80,000 120,000 4 80,000 120,000 5 120,000 6 60,000

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Answer:

Explanation:

Required rate of return r = 12 % .

Cash flow of project A = 300000 , 150000 , 150000 , 80000 , 80000 , 120000.

NPV of project A

300000 + 150000 / 1.12  + 150000 / 1.12²  + 80000 / 1.12³ + 80000 / 1.12⁴ +

120000 / 1.12⁵

= 300000 + 133928 +119579 + 56942 +50841 + 68091

= 729381 .

Equivalent annual annuity of Project A at the rate of 12 % .

729381  = NPVA of 1 at 12 %

729381 = A x 3.60478

A = 202337

EAA of project A is 202337 .

 

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