GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Net Present Value
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Profitability Index
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Internal Rate of Return
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Equivalent Annuity value
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Detailed explanation-1: -The equivalent annual annuity approach is one of two methods used in capital budgeting to compare mutually exclusive projects with unequal lives. The EAA approach calculates the constant annual cash flow generated by a project over its lifespan if it was an annuity.
Detailed explanation-2: -Mutually exclusive projects are capital projects which compete directly with each other. For example, if a manager has to make a choice strictly between undertaking either project X or Y, but not both of them concurrently, then projects X and Y are said to be mutually exclusive.
Detailed explanation-3: -Mutually exclusive projects: If the NPV of one project is greater than the NPV of the other project, accept the project with the higher NPV. If both projects have a negative NPV, reject both projects.
Detailed explanation-4: -The simplest way of choosing among mutually exclusive projects with equal lives is to compute the net present values of the projects and choose the one with the highest net present value. This decision rule is consistent with firm value maximization.