In the syllabus, they give two projects to choose from.
Project L has a 3 year life with a $35.66 NPV and 10% discount rate.
Project S has a 2 year life with a $28.93 NPV and same discount rate.
On the BAII Plus, for Project L, I set N=3, FV=0, I=10, and PV=35.66. I hit computer PMT and I get -14.34.
For Project S, I set N=2, and PV=28.93 and leave the rest the same. I get PMT equals to -16.67.
This is the same answer as given in the syllabus except the syllabus has positive 14.34 and positive 16.67. We are supposed to choose the project with the larger EAA so that would be S.
But, since the BAII spat out negative numbers, I would have chosen S since its EAA is less negative.
What am I doing wrong? How should I think of the negative PMT value? It is late night where I am and I am not thinking straight and getting confused.
Recall that the TVM buttons are cash flow buttons.
If you want positive annuity payments, you have to buy the annuity today: the PV is negative.
For the purpose of EAA, the signs for NPV and EAA should be the same.
- If project NPV is positive, then EAA is positive.
- If project NPV is negative, then EAA is negative.
For Project L, a project with NPV of 35.66 is equivalent to a project that generates an annual inflow of 14.34 for 3 years.
For Project S, a project with NPV of 28.93 is equivalent to a project that generates an annual inflow of 16.67 for 2 years.
You would then select Project S, which has a higher positive EAA.
If the project NPVs were negative, then their equivalents would have negative EAAs, so you would choose the one with smaller negative EAA.