Answer:
d. $1,376.74
Explanation:
The NPV for Project X is calculated as follows:
Year Cash outflow/inflow Present value factor Present value
0 -$10,000.00 1 -$10,000.00
1 $6,000.00 0.900901 $5,405.41
2 $8,500.00 0.811622 $6,898.79
NPV $2,304.20
For Project Y, the NPV is:
Year Cash outflow/inflow Present value factor Present value
0 -$10,000.00 1 -$10,000.00
1 $4,600.00 0.900901 $4,144.14
2 $4,600.00 0.811622 $3,733.46
3 $4,600.00 0.731191 $3,363.48
4 $4,600.00 0.658731 $3,030.16
Total $4,271.25
The formula for calculating Equivalent Annual Annuity is expressed as:
C = r*(NPV)/(1-(1+r)-n)
For Project X, where NPV = $2304.20
using r = 11% and n = 2
Plugging in values into the formula gives us:
C = 11%*$2304.20/(1-(1+11%)−2
=$1345.38
For Project Y, where NPV = $4271.25
using r = 11% and n = 4
Inserting the values into the formula, we find C = 11%*$4271.25/(1-(1+11%)−4
= $1376.74
Thus, the more profitable project is Y, with an equivalent annual annuity of $1376.74.
