EAA Approach

CFA Level II Corporate Finance
#1

Dear,

I’m just confused. Please kindly let me know the concept.

When it comes to EAA approach, it has the annual annuities from each project’s NPV

The higher EAA would be better.

But simply comparison to annual annuity is lack of timing value.

For exampe, A: NPV=3,245, 6years, interst rate=12% and B: NPV=2,577, 3years, interst rate=12%

The annuity for A is 789 and 1,073 for B.

A has only annuity of 789, which is less than 1,074 for B. But A is scheduled to receive the anuity 6 times and B for 3 times. Would just the bigger EAA be better?

Thank you

#2

Presumably, when B finishes, you’ll follow it with another B, giving you 1,073 for another 3 years: the total duration being the same as A.

That’s the basis of the theory, anyway.

#3

Thank you very much, I got it!!!

#4

My pleasure.

Good to hear.