A 5 yr project with an NPV of $253 and a required return of 12% or a 23 year project with an NPV of $342 and a required return of 11%? Which is the better investment based on the EAA method and what are the respective annuity payments.
first project with 5 years is better as its EAA (PMT) is higher than other one i.e. 70.18 as compared to other one which has PMT of 41.3
Thanks for bringing this up. COMPLETELY forgot about it. cfaboston you’re right though. i get the same thing. 1. PV= 253 N = 5 I/Y = 12 CPT PMT 2. PV = 342 N = 23 I/Y = 11 CPT PMT
A 5 yr project with an NPV of $253 and a required return of 12% will pay you !70.18 for five years and the other prohect pay you around $41
Equivalent annual annuity. Basically use the NPV, time horizon, and discount rates to calculate the equivalent annual payment. Decision rule is to maximize the EAA. This is an alternative to the least common multiple of lives approach, where you would repeat projects until they are on an even number of years, and calculate which series of projects has highest NPV. In your example, I think EAA for 5 yr project is: 70.18 EAA for 23 yr project is: 41.37 Should choose 5 yr project.
Correct all around