If Faleye Consulting’s WACC is 10% and both “projects” can be repeated indefinitely, the system that should be chosen is <u>System A</u>, and its EAA is <u>$2,866.91</u>.
<h3>What is the EAA of a project?</h3>
The EAA of a project is the Equivalent Annual Annuity. The EAA can be determined using the following formula.
EAA = r x NPV1 - (1 + r)-n
Where the EAA = Equivalent Annual Annuity
r = interest rate per period
n = project duration
NPV = Net present value of project
We can also compute the EAA by using an online finance calculator as follows:
<h3>Data and Calculations:</h3>
System A System B
After-tax cost $19,000 $13,000
After-tax cash flows $6,000 $6,000
Equipment duration 6 years 3 years
WACC = 10%
Annuity factor 4.355 2.487
Present value of cash flows $26,130 $14,922 ($6,000 x 2.487)
NPV $7,130 $1,922 ($14,922 - $13,000)
EAA (an online calculator) $2,866.91 $800.966
Thus, using the EAA rule, the computer system that should be chosen is System A because it has a higher EAA than System B.
Learn more about the equivalent annual annuity at brainly.com/question/20566589
