Your firm has the opportunity to choose between the following two mutually exclu

Question

Your firm has the opportunity to choose between the following two mutually exclusive projects: Expected Net Cash Flows Year Project S Project L 0 -500,000 -575,000 1 295,000 183,500 2 295,000 183,500 3 183,500 4 183,500 The projects provide a necessary service, so whichever project is selected that project is expected to be repeated into the foreseeable future. Both projects have a 10 percent cost of capital. Calculate the EAA for both projects and explain your rationale in selecting the best project.

Explanation / Answer

PV of Project S= -500000+ (295,000/1.1)+(295,000/1.1^2)= $11983.471 PV of Project L= -575000+(183,500/1.1)+(183,500/1.1^2)+(183,500/1.1^3)+(183,500/1.1^4)= $6670.31 Since the PV of project S is more, project S is selected.

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