Homework SourseLithium Inc is considering two mutually exclusive projects A
Lithium, Inc is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B cost $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc\'s required rate of return for these projects is 10%. The equivalent annual annuity amount for project A is: a) $13,357 b) $18,532 c) $15,024 d) $12,989
Solution
Option c 15024 is corect option beacuse NPV for 4 years needed to be calculated
| Project A | A | B | C | D | E | |
| 0 | 1 | 2 | 3 | 4 | ||
| 1 | Initial Investment | -95000 | ||||
| 2 | Cash flow | 65000 | 75000 | |||
| 3 | Investment at year 2 | -95000 | ||||
| 4 | Cash flows | 65000 | 75000 | |||
| 5 | Sum of cash flows | -95000 | 65000 | -20000 | 65000 | 75000 |
| 6 | Reuired rate of return | 10% | ||||
| NPV | $47,623.455 | NPV(A6,B5:E5)+A5 | ||||
| r*NPV | $4,762.35 | |||||
| (1-r)^-t | 0.683013455 | |||||
| 1-(1-r)^-t | 0.316986545 | |||||
| EAA=r *NPV/(1-(1+r)^-n) | $15,023.81 |
