Answer:
d. $1,376.74
Explanation:
NPV of Project X is
Year Cash outflow/inflow Present value factor Present value
0 -$10,000.00 1 -$10,000.00
1 $6,000.00 0.900901 $5,405.41
2 $8,500.00 0.811622 $6,898.79
NPV $2,304.20
NPV of Project Y is
Year Cash outflow/inflow Present value factor Present value
0 -$10,000.00 1 -$10,000.00
1 $4,600.00 0.900901 $4,144.14
2 $4,600.00 0.811622 $3,733.46
3 $4,600.00 0.731191 $3,363.48
4 $4,600.00 0.658731 $3,030.16
Total $4,271.25
Formula for calculation of Equivalent annual annuity is given by:
C = r*(NPV)/(1-(1+r)-n)
Applying the formula for project X, NPV =$2304,20
r = 11%, n = 2
Substituting the values in the above formula
C = 11%*$2304,20/(1-(1+11%)-2
=$1345.38
Applying the formula for project Y, NPV =$4271.25
r = 11%, n = 4
Substituting the values in the above formula
C = 11%*$4271.25/(1-(1+11%)-4
= $1376.74
Therefore, most profitable project is Y and its equivalent annual annuity = $1376.74.
