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

Question

Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%. The equivalent annual annuity amount for project B, rounded to the nearest dollar, is
    a. $17,385.
    b. $20,936.
    c. $22,789.
    d. $26,551.

Explanation / Answer

Year Machine B PVF@10% Present value 0 $               (120,000) 1.000 $            -120,000 1 $                   64,000 0.909 $                58,182 2 $                   67,000 0.826 $                55,372 3 $                   56,000 0.751 $                42,074 4 $                   45,000 0.683 $                30,736 Net present value $          66,362.95 ÷PVAF (10%,4) 3.170 Equalent annual annuity $                20,936

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