CA Intermediate · Financial Management and Strategic Management · Investment Decisions
Arjun Industries must choose between two mutually exclusive projects of unequal lives. Project A has an NPV of ₹1,20,000 over 3 years. Project B has an NPV of ₹1,50,000 over 5 years. The cost of capital is 10%; the annuity PV factor is 2.487 for 3 years and 3.791 for 5 years. What is the equivalent annual annuity (EAA) of Project A, to the nearest rupee?
The equivalent annual annuity of Project A is about ₹48,251, found by dividing its NPV of ₹1,20,000 by the 3-year annuity factor of 2.487. It exceeds Project B's EAA of ₹39,568, so A is better when lives differ.
- A₹48,251Correct
- B₹40,000
- C₹39,568
- D₹2,98,440
Explanation
EAA = NPV / annuity factor = 1,20,000 / 2.487 = ₹48,251. Project B's EAA is 1,50,000/3.791 = ₹39,568, so A is preferable. Dividing NPV by 3 years (₹40,000) ignores discounting, and multiplying by the factor (₹2,98,440) uses the wrong operation.
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