Lakeland Ramblers is considering two mutually exclusive projects to boost their tourist revenue.Project A costs $60,000 and would produce net cash flows of $25,000 for 5 years.Project B cost $100,000 and will produce annual net cash flows of $25,000 for 10 years.If Lakeland's cost of capital is 12%, which project should be chosen using the equivalent annual annuity method?
A)Project A, NPV is $17,941 higher
B)Project B, NPV is $11,125 higher
C)Project A, NPV is $28,383 higher
D)Project B, NPV is $21,567 higher

Question

Quizplus · Accepted Answer

Solution: NPVᴀ = -60,000 + 25,000(3.605) = $30,125
NPVʙ = -100,000 + 25,000(5.650) = $41,250
EAA(A) = 30,125/3.605 = $8,356.45
EAA(B) = 41,250/5.65 = $6,203
NPVᴀ = 8356/.12 = $69,633
NPVʙ = 6203/.12 = $51,692
NPVᴀ - NPVʙ = 69,633 - 51,692 = $17,941

Lakeland Ramblers Is Considering Two Mutually Exclusive Projects to Boost