You are evaluating two projects.You may accept only one of them.Project one will cost $379,000 initially and will pay $134,000 each year for the next 5 years.Project two will cost $454,000 initially,but will pay $101,000 for the next 10 years.The firm's cost of capital is 15%.Use the equal annual annuity method (EAA)to select between the two projects.Which project has the highest EAA and by how much? Round your answers to the nearest dollar.

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Quizplus · Accepted Answer

NPV of Project 1 = -C₀ + $CF × 11ea7fdb_fc8b_b195_a768_9f9bbadedba1_TB2902_11 NPV of Project 1 = -$379,000 + $134,000 × 3.35216 NPV of Project 1 = $70,189 EAA of Project 1 = NPV/ 11ea7fdb_fc8b_b196_a768_55d625c010a7_TB2902_11 EAA of Project 1 = 70,188.78/3.352155 = $20,938.41 NPV of Project 2 = -C₀ + $CF × 11ea7fdb_fc8b_b197_a768_7355b6c592bd_TB2902_11 NPV of Project 2 = -454,000 + 101,000 × 5.01877 NPV of Project 2 = $52,896 EAA of Project 2 = NPV/ 11ea7fdb_fc8b_d8a8_a768_97b9c92942c2_TB2902_11 EAA of Project 2 = 52,896/5.01877 = $10,539.56 So Project 1 has a higher EAA, by $10,398.

You Are Evaluating Two Projects