Mellon Corp. is considering two mutually exclusive projects to boost their touri
ID: 3200205 • Letter: M
Question
Mellon Corp. is considering two mutually exclusive projects to boost their tourist revenue. Project A costs $60,000 and would produce net cash flows of $25,000 for 5 years. Project B cost $100,000 and will produce annual net cash flows of $25,000 for 10 years. If Mellon cost of capital is 12%, which project should be chosen using the equivalent annual annuity method? Show all work:
a. Project A, EAA $8,356
b. Project B, NPV is $41,250
c. Project A, NPV is $28,300 higher
d. Project B, EAA $6,203
Explanation / Answer
Solution :
NPVA = - 60,000 + 25,000 * (3.605) = $ 30,125
NPVB = - 100,000 + 25,000 * (5.650) = $ 41,250
EAA(A) = 30,125/3.605 = $ 8,356.45
EAA(B) = 41,250/5.65 = $ 6,203
NPVA = 8356/0.12 = $ 69,633
NPVB = 6203/0.12 =$ 51,692
NPVA - NPVB = 69,633 - 51,692 = $ 17,941