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Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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
Transcribed Image Text: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.
Black Sheep Broadcasting is considering a three-year project that has a weighted average cost of capital of 12% and a net present value
(NPV) of $49876. Black Sheep Broadcasting can replicate this project indefinitely.
What is the equivalent annual annuity (EAA) for this project?
$21,804
$24,919
$20,766
$25,958
An analyst will need to use the EAA approach to evaluate projects with unequal lives when the projects are
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