Crossborder,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.Crossborder uses the equivalent annual annuity (EAA)method and has a discount rate of 13%.Which project(s),if any,will Crossborder accept?
A)Crossborder will take Project B because it has a positive NPV and its EAA is greater than that for Project A.
B)Crossborder rejects both projects because both have a negative NPV (and thus negative EAA).
C)Crossborder accepts both projects because both have a positive NPV (and thus positive EAA).
D)Crossborder accepts Project A because its EAA of about $7,975 is greater than Project B's EAA of about $6,440.

Question

Quizplus · Accepted Answer

The EAA for Project B is greater than that for Project A, indicating that Project B provides a higher annualized return, making it the preferred choice.