Problem12:

The ABC Company is considering the purchase of the new equipment. It can buy either equipment A or equipment B, so the investment projects are mutually exclusive. Assume that both projects can be repeated indefinitely. Equipment A has an NPV of20,000 over a 3-year life, and Equipment B has an NPV of25,000 over a 5-year life. The project types are equally risky, and the firm's cost of capital is 12%.

1)Calculate the equivalent annual annuity (EAA) for each project;

2)Using the EAA approach, determine which project should be chosen.