The cash flows for two projects, A and B, are shown in the table, belo

The cash flows for two projects, A and B, are shown in the table, below. Notice that Project A has a life of 5 years and Project B has a 3 year life.

Calculate the NPV of each project and calculate which should be adopted using the equivalent annual annuity approach. Assume that the cost of capital is 10%.

Project CFs Project CFs
Time A B
0 -100 -150
1 20 75
2 25 60
3 30 50
4 30
5 40
NPV 6.7097 5.3343

A) Project A is better.
B) Project B is better.
C) The two projects are the same.

ANSWER

B