You Are Evaluating Two Projects

question 69

Multiple Choice

You are evaluating two projects.You may accept only one of them.Project one will cost $379,000 initially and will pay $134,000 each year for the next 5 years.Project two will cost $454,000 initially,but will pay $101,000 for the next 10 years.The firm's cost of capital is 15%.Use the equal annual annuity method (EAA) to select between the two projects.Which project has the highest EAA and by how much? Round your answers to the nearest dollar.

• A) Project 2 has a higher EAA by $10,398.
• B) Project 2 has a higher EAA by $1,794.
• C) Project 1 has a higher EAA by $10,398.
• D) Project 1 has a higher EAA by $1,794.
• E) The two projects have equal EAA.

---

Definitions:

Expense Recognition

The accounting principle dictating that expenses are recorded when incurred, not necessarily when paid.

Financial Capital Maintenance

A concept where profit is only recognized if the financial amount of a company's net assets at the end of the period exceeds the financial amount at the beginning, excluding any distributions to, or contributions from, owners during the period.

Net Income

The amount of earnings left over after all expenses, including taxes and cost of goods sold, have been subtracted from total revenue, indicating the financial success or profitability of a company over a specified period.

Extraordinary Items

Events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence, significantly impacting a company's financial position.