Apple, Inc. is considering Project A and Project B, which are two mutu

Apple, Inc. is considering Project A and Project B, which are two mutually exclusive projects with unequal lives.

Project A is an eight-year project that has an initial outlay or cost of $140,000. Its future cash inflows for years 1 through 8 are the same at $36,500. Project B is a six-year project that has an initial outlay or cost of $160,000. Its future cash inflows for years 1 through 6 are the same at $48,000. Apple uses the equivalent annual annuity (EAA) method and has a discount rate of 13%. Which project(s), if any, will Apple accept?
A) Apple will take Project B because it has a positive NPV and its EAA is greater than that for Project A.
B) Apple rejects both projects because both have a negative NPV (and thus negative EAA).
C) Apple accepts both projects because both have a positive NPV (and thus positive EAA).
D) Apple accepts Project A because its EAA of about $7,975 is greater than Project B’s EAA of about $6,440.

ANSWER

Answer: A
Explanation: A) We will compute the EAA for both projects and choose the one with the greater positive EAA since the projects are mutually exclusive and only one can be taken. If both EAAs are negative then we will reject both projects. If one Project has a negative NPV (and thus negative EAA), then we will choose the project with the positive NPV (and thus positive EAA). For Project A, the NPV = -CF0 + .
Inserting the given values, we have:
NPV = -$140,000 + = -$140,000 + ($36,500 × 4.79877)
= -$140,000 + $175,155.12 = $35,155.12. The EAA is the NPV divided by the PVIFA.
We have: EAA (Project A) = = $7,325.86.
For Project B, the NPV = -CF0 +
= -$160,000 + = -$160,000 + ($48,000 × 3.997550)
= -$160,000 + $191,882.39 = $31,882.39. The EAA is the NPV divided by the PVIFA. We have: EAA (Project A) = = $7,975.48. Apple will take Project B because it has a positive NPV and its EAA is greater than that for Project A.