Trudeau, 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. Trudeau uses the equivalent annual annuity (EAA) method and has a discount rate of 13%. Which project(s), if any, will Trudeau accept?
A) Trudeau will take Project B because it has a positive NPV and its EAA is greater than that for Project A.
B) Trudeau rejects both projects because both have a negative NPV (and thus negative EAA).
C) Trudeau accepts both projects because both have a positive NPV (and thus positive EAA).
D) Trudeau accepts Project A because its EAA of about $7,975 is greater than Project B's EAA of about $6,440.

Question

Quizplus · Accepted Answer

The EAA for Project B is higher than that for Project A, indicating that Project B provides a higher annualized return when considering the time value of money at a 13% discount rate.