medium · Principles of Finance capital-budgeting
An industrial project has a constant annual NPV of 5,000 and a life of 3 years. Another project has an NPV of 7,000 and a life of 5 years.
If the discount rate is 10%, which project is preferred using the Equivalent Annual Annuity (EAA) method?
- Project with 3-year life (EAA ≈ $2,011)
- Project with 5-year life, because 7,000 > 5,000
- Project with 5-year life (EAA ≈ $1,847)
- Neither, as they have different lives
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