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CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control

Mehta Pharma is comparing two mutually exclusive projects, one with NPV Rs 2,00,000 and a life of 2 years, another with NPV Rs 3,00,000 and a life of 3 years. Which is the correct approach and result using equivalent annual annuity at 10%? (Annuity factors at 10%: 2 years 1.736, 3 years 2.487)

Project B is preferred because its equivalent annual annuity of about Rs 1,20,628 exceeds Project A's Rs 1,15,207. Dividing each NPV by its annuity factor puts unequal-life projects on a comparable yearly basis, so the higher raw NPV happens to agree here.

  1. AProject A, EAA about Rs 1,15,207
  2. BProject B, EAA about Rs 1,20,628Correct
  3. CProject B, because its NPV is higher
  4. DProject A, because its life is shorter

Explanation

EAA of A = 2,00,000/1.736 = 1,15,207. EAA of B = 3,00,000/2.487 = 1,20,628. B has the higher EAA, so B is preferred. Choosing on raw NPV ignores unequal lives, and shorter life alone is not the criterion.

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