Annuity the projects eaas can be compared to the can

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Unformatted text preview: I = 14, solve: PMT = -617.24. PMT Machine 2: PV = 1664, N = 6, I = 14, solve: PMT = -427.91. PMT EAA1 = $617 EAA2 = $428 This tells us that: NPV1 = annuity of $617 per year. $617 NPV2 = annuity of $428 per year. $428 So, we’ve reduced a problem with So, different time horizons to a couple of annuities. annuities. Decision Rule: Select the highest EAA. We would choose machine #1. EAA. Step 3: Convert back to NPV ∞ Step 3: Convert back to NPV ∞ Assuming infinite replacement, the Assuming EAAs are actually perpetuities. Get the PV by dividing the EAA by the required rate of return. rate Step 3: Convert back to NPV ∞ Assuming infinite replacement, the Assuming EAAs are actually perpetuities. Get the PV by dividing the EAA by the required rate of return. rate ∞ NPV 1 = 617/.14 = $4,407 NPV Step 3: Convert back to NPV ∞ Assuming infinite replacement, the Assuming EAAs are actually perpetuities. Get the PV by dividing the EAA by the required rate of return. rate ∞ NPV 1 = 617/.14 = $4,407 NPV ∞ NPV 2 = 428/.14 = $3,057 NPV Step 3: Convert back to NPV ∞ Assuming infinite replacement, the Assuming EAAs are actually perpetuities. Get the PV by dividing the EAA by the required rate of return. rate ∞ NPV 1 = 617/.14 = $4,407 NPV ∞ NPV 2 = 428/.14 = $3,057 NPV This doesn’t change the answer, of This course; it just converts EAA to a NPV that can be compared. that...
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This note was uploaded on 01/17/2014 for the course GEB 3375 taught by Professor Sweo during the Winter '08 term at University of Central Florida.

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