Formulas Data Review View Help T File Home Insert Page Layout Insert AutoSum Rec
ID: 2812369 • Letter: F
Question
Formulas Data Review View Help T File Home Insert Page Layout Insert AutoSum Recently Financial Logical Text Date & Lookup & Math & More Name unction Used Time-Reference . Trig. Functions-Manager Def Function Library 12 You are considering 2 mutually exclusive projects, both of which are renewable. Project A: an investment of $400 that will increase annua operating revenue by $200 for 5 years. Project B: an investment of $200 that will increase your annual operating revenue by $300 for 2 years only. The discount rate is 10%. As the financial consultant, which project will you recommend and why? 2 Interest rate 10% Year Project A Project B -400 200 200 200 200 200 200 300 300 Which alternative do you 12 recommend?Explanation / Answer
The two projects have unequal lives, hence the best way to decide which project to choose is to find the equivalent uniform annual worth of the projects. The project with highest uniform annual worth is chosen.
Equivalent annual cash flow of project A = - $ 400 ( A/P , 5 years , 10% ) + $ 200
Equivalent annual cash flow of project A = - $ 400 * 0.263797 + $ 200
Equivalent annual cash flow of project A = $ 94.48
Equivalent annual cash flow of project B = - $ 200 ( A/P , 2 years , 10% ) + $ 300
Equivalent annual cash flow of project B = - $ 200 * 0.576190 + 300
Equivalent annual cash flow of project B = $ 184.76
Project B has higher equivalent annual cash flows than project A, hence project B is recommended.