Casa Chica is considering replacing a piece of equipment.Alternative A costs $80,000, has an eight year life and would produce net cash flows of $18,000 in each of the eight years.Alternative B costs $65,000, has a six year life and would produce net cash flows of $18,000 in each of the six years.If Chica's cost of capital is 13 percent, which alternative should be chosen using the equivalent annual annuity method?
A)Project A
B)Project B
C)Indifferent between the two projects
D)Neither, because both projects have a negative NPV

Question

Quizplus · Accepted Answer

NPVᴀ = -$80,000 + $18,000(4.799) = $6,382 NPVʙ = -$65,000 + $18,000(3.998) = $6,964
EAA(A) = $6,382/4.799 = $1,330 EAA(B) = $6,964/3.998 = $1,742 NPVᴀ = $1,330/0.13 = $10,231 NPVʙ = $1,742/0.13 = $13,400 NPVʙ - NPVᴀ = $3,169
9.

Casa Chica Is Considering Replacing a Piece of Equipment