Another method to deal with the unequal life problem of projects is the equivalent annual annuity (EAA) method. In this method the annual cash flows under the alternative investments are converted into a constant cash flow stream whose NPV is equivalent to the NPV of the comparative project's Initial stream. Consider the case of Three Waters Boatbuilders: Three Waters Boatbuilders is considering a three-year project that has a weighted average cost of capital of 10% and a net present value (NPV) of $85,647. Three Waters Boatbuilders can replicate this project indefinitely. The equivalent annual annuity (EAA) for this project is The EAA approach to evaluating projects with unequal lives does not do a good job of taking inflation into account.

Another method to deal with the unequal life problem of projects is the equivalent annual annuity (EAA) method. In this method the annual cash flows under the alternative investments are converted into a constant cash flow stream whose NPV is equivalent to the NPV of the comparative project's Initial stream. Consider the case of Three Waters Boatbuilders: Three Waters Boatbuilders is considering a three-year project that has a weighted average cost of capital of 10% and a net present value (NPV) of $85,647. Three Waters Boatbuilders can replicate this project indefinitely. The equivalent annual annuity (EAA) for this project is The EAA approach to evaluating projects with unequal lives does not do a good job of taking inflation into account.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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