EAA Example Problem

# EAA Example Problem - EAAExampleProblem#1 AfterTaxCashFlows...

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EAA Example Problem #1 After-Tax Cash Flows: Year        Machine 1       Machine 2     0             (45,000)          (45,000)     1  20,000             12,000     2  20,000             12,000     3  20,000             12,000     4       12,000     5       12,000     6       12,000 Assume a required return of  14%. Step 1: What is the NPV for each option? If we assume that each project will be  replaced an infinite number  of times in  the future , we can convert each NPV to   an annuity . The projects’ EAAs can be compared to  determine which is the best project! EAA:   Simply find the annuity payment  that has the same PV (i.e. NPV), life,  and discount rate as the project. Key to EAA Solution:  Spread the NPV  over the life of the project.

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Key to EAA Solution:  Spread the NPV  over the life of the project.
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