Johnson Jets is considering two mutually exclusive projects. Project A has an up

Question

Johnson Jets is considering two mutually exclusive projects. Project A has an up-front cost of $124,000 (CFo -124,000), and produces positive after-tax cash inflows of $30,000 a year at the end of each of the next six years Project B has an up-front cost of $59,000 CFo -59,000) and produces after-tax cash inflows of $20,000 a year at the end of the next four years. Assuming the cost of capital is 10.5%. 1 Compute the equivalent annual annuity of project A in box 1. Round the EA.A to a whole dollar without the dollar sign or comma, e.g, 3452 (non-negative number) 2. Compute the equivalent annual annity of project B in box 2 The same format as box 1 3 Decide which project to undertake in box 3, either Project A or Project B Blank # 1 Blank # 2 Blank # 3

Explanation / Answer

= 4763

Equivalent annual annuity of Project A = 4763 / 4.2921

= 1109.71

= 3716

Equivalent annual annuity of Project B = 3716 / 3.1358

= 1185.02

So, Project B should be accepted.

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