Mr Smith was approached by external consultants who were offering two investment projects suiting the company’s business strategy

Finance Dec 24, 2020

Mr Smith was approached by external consultants who were offering two investment projects suiting the company’s business strategy. Project A. Capital outlay of $1’000’000, 10-year life, and 10% discount rate Project B. Capital outlay $1’600’000, 15-year life, and 10% discount rate Help the team of financial managers to compute the equivalent annual costs for both projects and to make an investment decision. What are the equivalent annual costs for the project A and project B? Which one is a better investment option for Amazing Integration Ltd.?

Expert Solution

EAC=Initial Cost*rate/(1-1/(1+rate)^n)

Project A=1000000*10%/(1-1/1.1^10)=162745.394882512

Project B=1600000*10%/(1-1/1.1^15)=210358.043019795

Project A is better

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