Problem:
Your firm has the opportunity to choose between the following two mutually exclusive projects:
|
|
Expected Net Cash Flows
|
|
Year
|
Project S
|
Project L
|
|
0
|
-500,000
|
-575,000
|
|
1
|
295,000
|
183,500
|
|
2
|
295,000
|
183,500
|
|
3
|
|
183,500
|
|
4
|
|
183,500
|
The projects provide a necessary service, so whichever project is selected that project is expected to be repeated into the foreseeable future. Both projects have a 10 percent cost of capital. Calculate the EAA for both projects and your rationale in selecting the best project.