10. The equivalent annual annuity approach - Evaluating projects with unequal lives

Evaluating projects with unequal lives

Blanche Inc. is Canadian firm that wants to expand its business internationally. It is considering potential projects in both Germany and Ukraine, and the German project is expected to take six years, whereas the Ukrainian project is expected to take only three years. However, the firm plans to repeat the Ukrainian project after three years. These projects are mutually exclusive, so Blanche Inc.s CFO plans to use the equivalent annual annuity (EAA) approach to analyze both projects. The expected cash flows for both projects follow:

German Project Cash Flow

Project:	Cash Flow
Year 0	$650,000
Year 1	$220,000
Year 2	$240,000
Year 3	$245,000
Year 4	$270,000
Year 5	$120,000
Year 6	$100,000

Ukrainian Project Cash Flow

Project:	Cash Flow
Year 0	$475,000
Year 1	$225,000
Year 2	$235,000
Year 3	$255,000

If Blanche Inc.s cost of capital is 12%, what is the NPV of the German project?

$192,361

$202,485

$182,237

$172,112

If Blanche Inc.s cost of capital is 12%, what is the NPV of the Ukrainian project?

$71,128.66

$94,737.38

$66,739.95

$67,938.77

What is the EAA for the Ukrainian project?

$23,937.05

$28,439.52

$39,443.81

$14,722.73

What is the EAA for the German project?

$49,249.66

$55,610.58

$66,070.93

$39,977.75

If the CFO uses the EAA approach to decide which project to undertake, he should choose the _________ project because it has the ________ EAA.