Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A

Question

Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs $75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 in year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellars, Inc.'s required rate of return for these projects is 10%. The equivalent annual annuity amount for project A is ________. Answer $4,485 $2,889 $3,357 $5,532 Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs $75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 in year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellars, Inc.'s required rate of return for these projects is 10%. The equivalent annual annuity amount for project A is ________. Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs $75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 in year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellars, Inc.'s required rate of return for these projects is 10%. The equivalent annual annuity amount for project A is ________. $4,485 $2,889 $3,357 $5,532 $4,485 $2,889 $3,357 $5,532

Explanation / Answer

Equivalent Annual Annuity CF C = NPV*r/(1-1/(1+r)^n)

NPV of Proj A = 48000/1.1 + 45000/1.1^2 -75000 = $5,826

5826 = X/1.1 + X/1.1^2

X = $ 3356.885

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