A trend among universities is to guarantee tuition to incoming freshmen for a four-year period. Further, the annual amount due is collected in equal payments collected every three months.
Although the payments are equal as well as equally spaced, this is NOT an example of an annuity because the payments are made every three months rather than on a monthly or annual basis.
Indicate whether the statement is true or false.
Question 2
The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years. The
after-tax cash flows for projects S and L are listed below.
Year Cash Flow S Cash Flow L
0 -60,000 -51,500
1 40,000 13,000
2 20,000 19,000
3 17,000 11,000
4 20,000
5 10,000
6 8,000
Calculate the equivalent annual annuity for each project assuming a required return of 15. What decision
should be made?
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