EAA Finquiz Mock

CFA Level II Corporate Finance
#1

Option 1: A machine with a useful life of 3 years that requires an initial investment of $32,500. The investment is expected to return $13,700, $15,900 and $17,000 during its three years of useful life respectively.

Option 2: A machine with a useful life of 4 years that requires an initial investment of $40,000. The cash flows from the investment equal $12,000, $14,500, $25,000 and $7,000 respectively

NPV of Option 1: -32,500 + PV(13,700)+PV(15,900)+PV(17,000) = $4,507.79 NPV of Option 2: -40,000+ PV(12,000) +PV(14,500) + PV(25,000) + (7,000) = $4,516.73 Checking EAA of Option 1: $1,876.81 EAA of Option 2: $1,487.05 Hence, Hagen should choose option 2.

My QSN is, I thought you choose the option with the Highest EAA OPTION 1

#2

You DO choose the option with the highest EAA. May just be an error on the provider’s end assuming you calculated everything correctly.

#3

Your calculations are correct assuming a 12% discount rate. However, the question you state doesnt show a discount. Make sure you’re using the right rates, and if you are, its a mistake in the mock.