1. Chris has $16,000 that she wants to invest for 1 year. She can invest it in Bank X and earn 5.50 percent simple interest. Or, she can open an account at Bank Y and earn 5.39 percent interest, compounded monthly. If Chris decides to invest at Bank X, she will:
A. earn the same amount as if she had invested with Bank Y.
B. have a total balance of $16,800 in her account after 1 year.
C. earn $4.03 less than if she had invested with Bank Y.
D. earn $17.60 more than if she had invested with Bank Y.
2. Which of the statements below is FALSE?
We calculate the equivalent annual annuity by taking the NPV of the project and find the annuity stream that equates to the NPV, using the appropriate discount rate for the project and life of the project.
In dealing with mutually exclusive projects of unequal lives, we can compute the EAA for the NPV of the project over the life of the project.
One of the advantages of NPV over other decision models is that we can select the appropriate discount rate for each individual project and still compare the resulting NPVs across different projects.
By using the EAA approach for mutually exclusive projects, we overcome all potential problems.