Answer:
$1,033,190.69 ; better
Explanation:
Given:
Present value of cash flow of Project A (PV) = $5,200,000
Maturity (nper) = 7 years
Required return (rate) = 9%
Annual annuity (pmt) can be computed using spreadsheet function =pmt(rate,nper,PV,FV). Substituting the values, we get,
=pmt(0.09, 7, -5200000)
=$1,033,190.69
FV is 0. Present value is negative as it's cash outflow.
Annual annuity of Project A is $1,033,190.69
Project B:
Given:
Present value of cash flow of Project A (PV) = $3,800,000
Maturity (nper) = 5 years
Required return (rate) = 9%
Annual annuity (pmt) can be computed using spreadsheet function =pmt(rate,nper,PV,FV). Substituting the values, we get,
=pmt(0.09, 5, -3800000)
=$976,951.34
FV is 0. Present value is negative as it's cash outflow.
Annual annuity of Project B is $976,951.34
Annual annuity of Project is more than that of Project B, So Project A is better than Project B.
