Determine the five-year equivalent annual annuity of the following project if the appropriate
discount rate is 16.
Initial Outflow = 150,000
Cash Flow Year 1 = 40,000
Cash Flow Year 2 = 90,000
Cash Flow Year 3 = 60,000
Cash Flow Year 4 = 0
Cash Flow Year 5 = 80,000
A) 7,058 B) 9,872 C) 9,454 D) 8,520
Question 2
Your firm is considering investing in one of two mutually exclusive projects. Project A requires an
initial outlay of 3,500 with expected future cash flows of 2,000 per year for the next three years.
Project B requires an initial outlay of 2,500 with expected future cash flows of 1,500 per year for
the next two years. The appropriate discount rate for your firm is 12 and it is not subject to capital
rationing. Assuming both projects can be replaced with a similar investment at the end of their
respective lives, compute the NPV of the two chain cycle for Project A and three chain cycle for
Project B.
A) 2,865 and 94 B) 3,528 and 136
C) 5,000 and 1,500 D) 2,232 and 85
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