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The Harry Hines Medical Center needs to decide between two projects with different lives. Project ‘A’...

The Harry Hines Medical Center needs to decide between two projects with different lives. Project ‘A’ has a $20,000 initial cost, a useful life of 5 years, and a net present value of $1,000. What is the Equivalent Annual Annuity (EAA) value of Project ‘A’ using a 12% discount rate?

Group of answer choices

$277

$5,548

$1,762

$11,349

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Answer #1

Equivalent Annual Annuity (EAA) value of Project-A

Equivalent Annual Annuity (EAA) is calculated by dividing the Net Present Value of the Project with the Present Value annuity factor

Equivalent Annual Annuity (EAA) value of Project-A = Net Present Value of the Project / (PVIFA 12%, 5 Years)

= $1,000 / 3.60478

= $277

“Hence, the Equivalent Annual Annuity (EAA) value of Project-A will be $277”

NOTE

The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.

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