Platinum, Inc. is considering two mutually exclusive projects, X and Y. Project X costs $95,000 today and is expected to generat
e $65,000 in year one and $75,000 in year two. Project Y 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. The firm's investors require a rate of return of 15% and the weighted average cost of capital is 12%. What is the equivalent annual annuity for Project Y needed to compare the two projects
1 answer:
Answer:
EAA = $17,115.23
Explanation:
Please check the attached image for the formula of the equivalent annual annuity
To calculate the EAA, the NPV of project Y has to be determined:
Net present value can be calculated using a financial calculator:
Cash flow in year 0 = $-120,000
Cash flow in year 1 = $64,000
Cash flow in year 2 = $67,000
Cash flow in year 3 = $56,000
Cash flow in year 4 = $45,000
I = 15%
NPV = $48,863.60
EAA = $17,115.23
To find the NPV using a financial calacutor:
1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.
2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.
3. Press compute
I hope my answer helps you
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