What is the equivalent annual annuity for german project

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Reference no: EM131563484

Your company is considering starting a project in either Germany or the U.S. - and are mutually exclusive.

German project is a 6 year project with the following expected cash flows:

Year 0 = -$650,000

Year 1 = 220,000

Year 2 = 240,000

Year 3 = 245,000

Year 4 = 270,000

Year 5 = 120,000

Year 6 = 100,000

U.S. project is a 3 year project; however the company plans to repeat the project after 3 years. The expected cash flows are:

Year 0 = -$530,000

Year 1 = 280,000

Year 2 = 290,000

Year 3 = 310,000

Due to the project unequal lives, use the annual annuity approach to evaulate them, the approprite cost of capital for both project is 11%.

What is the NPV of the German project?

What is the NPV of the U.S. project?

What is the equivalent annual annuity (EAA) for the German project?

What is the EAA for the U.S. project?

If the CFO uses the EAA approach to decide which project to undertake, he should choose the German/U.S. project because it has the highest/lowest EAA.

Reference no: EM131563484

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