The present value of the total costs over a five-year period for Project April is $50,000.The net present value of total costs over a 4-year period for Project October is $40,000.The company uses a discount rate of 9%.Which project should it choose and why?

Question

Quizplus · Accepted Answer

To compare the two projects, we need to calculate their equivalent annual cost (EAC) using the formula:

EAC = (Present value of total costs) x (Discount rate / 1 - 1 / (1 + Discount rate) ^ Number of years)

For Project April: EAC = (50,000) x (0.09 / 1 - 1 / (1 + 0.09) ^ 5) = $12,776.67

For Project October: EAC = (40,000) x (0.09 / 1 - 1 / (1 + 0.09) ^ 4) = $12,703.98

Project October has a lower EAC, which means it is the better choice. Additionally, it has a shorter life, which may be preferable for the company.

The Present Value of the Total Costs Over a Five-Year