EQUIVALENT ANNUAL ANNUITY A firm has two mutually exclusive investment projects to evaluate; both can be repeated indefinitely. The projects have the following cash flows:
|
Time |
Size |
IRR |
|
0 |
$100,000 |
$70,000 |
|
1 |
30,000 |
30,000 |
|
2 |
50,000 |
30,000 |
|
3 |
70,000 |
30,000 |
|
4 |
— |
30,000 |
|
5 |
— |
10,000 |
Projects X and Y are equally risky and may be repeated indefinitely. If the firm’s WACC is 12%, what is the EAA of the project that adds the most value to the firm?