The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years. The
after-tax cash flows for projects S and L are listed below.
Year Cash Flow S Cash Flow L
0 -$60,000 -$51,500
1 40,000 13,000
2 20,000 19,000
3 17,000 11,000
4 20,000
5 10,000
6 8,000
Calculate the equivalent annual annuity for each project assuming a required return of 15%. What decision
should be made?
Choose Project S. Although the NPV of Project L (NPV = $1,269.21 ) is greater than the NPV of Project S (NPV =
$1,083.26), this is due to the longer life of project L. The equivalent annual annuity for Project S is $474.44, while the
equivalent annual annuity for Project L is only $335.37.
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