Worcester Corp is considering two mandated projects. They would serve the same purpose and be mutually exclusive. The present value of total costs over a five year period for Project November is $50,000. The present value of total costs over a 4 year period for project December is $40,000. The company uses a discount rate of 9%. Which project should it choose and why?
A) November because the NPV is higher.
B) November because EAC is higher.
C) December because it has a shorter life.
D) December because it has lower EAC.

Question

Quizplus · Accepted Answer

The correct choice is December because it has a lower Equivalent Annual Cost (EAC). EAC allows for the comparison of the annual cost of each project over their respective lifespans, making it easier to compare projects with different durations. Since December has a lower present value of total costs and the question implies cost minimization is the goal, when those costs are annualized, December will likely have a lower EAC, making it the more cost-effective choice.

Worcester Corp Is Considering Two Mandated Projects