Homework answers / question archive / Equivalent annual annuities Another method to deal with the unequal life problem of projects is the equivalent annual annuity (EAA) method

Equivalent annual annuities Another method to deal with the unequal life problem of projects is the equivalent annual annuity (EAA) method

Finance

Share With

Equivalent annual annuities Another method to deal with the unequal life problem of projects is the equivalent annual annuity (EAA) method. In this method the annual cash flows under the alternative investments are converted into a constant cash flow stream whose NPV is equivalent to the NPV of the comparative project's initial stream. Consider the case of Three Waters Boatbuilders: Three Waters Boatbuilders is considering a four-year project that has a weighted average cost of capital of 11% and a net present value (NPV) of $75,682. Three Waters Boatbuilders can replicate this project indefinitely. The equivalent annual annuity (EAA) for this project is The EAA approach to evaluating projects with unequal lives do a good job of taking inflation into account.