Worcester Corp is considering two mandated projects.They would serve the same purpose and be mutually exclusive.The present value of total costs over a five-year period for Project November is $50,000.The present value of total costs over a four-year period for Project December is $40,000.The company uses a discount rate of 9%.Which project should it choose and why?
A)November because the NPV is higher.
B)November because EAC is higher.
C)December because it has a shorter life.
D)December because it has lower EAC.

Question

Quizplus · Accepted Answer

The correct choice is D, December because it has lower Equivalent Annual Cost (EAC). EAC is a method of comparing the cost effectiveness of projects with different lifespans by converting their costs into an annualized value. Even though Project December has a shorter life and lower present value of total costs, the key factor for decision-making in this context is the cost efficiency over time, which is represented by the EAC. Since the question implies a focus on cost efficiency (without providing specific NPV values for benefits), the project with the lower EAC (indicating lower annual costs for the company) is the preferable choice.

Worcester Corp Is Considering Two Mandated Projects