The Projected Cash Flows for Two Mutually Exclusive Projects Are

question 130

Essay

The projected cash flows for two mutually exclusive projects are as follows:
$\begin{array}{lll}\text { Year } & \text { Project } A & \text { Project B } \\0 & (\$ 150,000) & (\$ 200,000) \\1 & 80,000 & 40,000 \\2 & 60,000 & 50,000 \\3 & 50,000 & 50,000 \\4 & & 60,000 \\5 & & 50,000 \\6 & & 53,000\end{array}$ If the cost of capital is 10%, does the equivalent annual annuity method give a clear indication of which project should be undertaken? Calculate the EAAs for both projects and comment on the result