Nevada Inc. is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $40 million per year. Plane B has a life of 10 years, will cost $90 million, and will produce net cash flows of $30 million per year. Company’s cost of capital is 12%.
a) Calculate the discounted payback period of each plane.
b) Calculate equivalent annual annuity (EAA) of each plane.