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Flores Fish Fine Foods has $2,000,000 for capital investments this year and is considering two potential projects for the funds. Project 1 is updating the deli section of the store for additional food service. The estimated annual after-tax cash flow of this project is $600, 000 per year for the next five years. Project 2 is updating the store's wine section. The estimated annual after-tax cash flow for this project is $530,000 for the next six years. If the appropriate discount rate for the deli expansion is 9.5% and the appropriate discount rate for the wine section is 9.0%, use the NPV to determine which project Flores Fish should choose for the store.
Using the data above for Flores Fish Fine Foods you notice that each project has an unequal number of years which isn't a true apples to apples comparison. So, you need to calculate the EAA which adjusts the NPV for comparing two projects with unequal lives. Which project do you pick now?
Hint: you can use time value functions to solve for EAA. Same as solving for PMT.
a. Pick the deli section with an EAA of $85,254.72
b. Pick the wine section with an EAA of $77,246.33
c. Pick the deli section with an EAA of $79,127.16
d. Pick the wine section with an EAA of $84,160.43

Sagot :

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