Your company is considering starting a project in either Spanish or Ukraine - and are mutually exclusive.
Spanish project is a 6 year project with the following expected cash flows:
Year 0 = -$1,120,000
Year 1 = 370,000
Year 2 = 390,000
Year 3 = 420,000
Year 4 = 330,000
Year 5 = 220,000
Year 6 = 95,000
Ukraine project is a 3 year project; however the company plans to repeat the project after 3 years. The expected cash flows are:
Year 0 = -$520,000
Year 1 = 275,000
Year 2 = 280,000
Year 3 = 295,000
Due to the project unequal lives, use the annual annuity approach to evaulate them, the approprite cost of capital for both project is 9%.
What is the NPV of the Spanish project? a)$242,867 b)269,852 c)283,345 d)296,837
What is the NPV of the Ukraine project? a)183,042 b)116,848 c)116,172 d)120,078
What is the equivalent anual annuity (EAA) for the Ukraine project?
What is the EAA for the Spanish project?
If the CFO uses the EAA approach to decide which project to undertake, he should choose the Ukraine/Spanish project because it has the highest/lowest EAA.