Question
Disney needs to close Magic Kingdom to remodel and update the castle. Disney's advisors presented two renovation alternatives: (1) a quick facelift or (2) a
Disney needs to close Magic Kingdom to remodel and update the castle. Disney's advisors presented two renovation alternatives: (1) a quick facelift or (2) a complete rebuild. The quick facelift would cost $10 million, would generate annual after-tax cash flows of $3.75 million per year on completion, and would last only 5 years until another facelift was needed. The complete rebuild would cost $20 million, would also generate annual cash flows of $3.75 million per year on completion, and would last 19 years until another renovation was needed. Assume Disney always renovates the Magic Kingdom when needed. What is the Equivalent Annual Annuity (EAA) for the option Disney should choose? Assume a cost of capital of 6.0%.
- 1.958
- 1.769
- 1.827
- 1.893
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