The equivalent annual annuity approach - Evaluating projects with unequal lives Evaluating projects with unequal lives Blanche Inc. is a Canadian firm that wants to expand its business internationally. It is considering potential projects in both France and Ukraine, and the French project is expected to take six years, whereas the Ukrainian project is expected to take only three years. However, the firm plans to repeat the Ukrainian project after three years. These projects are mutually exclusive, so Blanche Inc.’s CFO plans to use the equivalent annual annuity (EAA) approach to analyze both projects. The expected cash flows for both projects follow:

French Project

Year

Cash Flow

Year 0–$975,000
Year 1$350,000
Year 2$370,000
Year 3$390,000
Year 4$320,000
Year 5$115,000
Year 6$80,000
Ukrainian Project

Year

Cash Flow

Year 0–$475,000
Year 1$225,000
Year 2$235,000
Year 3$255,000
If Blanche Inc.’s cost of capital is 12%, what is the NPV of the French project?



If Blanche Inc.’s cost of capital is 12%, what is the NPV of the Ukrainian project?



What is the EAA for the Ukrainian project?



What is the EAA for the French project?


If the CFO uses the EAA approach to decide which project to undertake, he should choose the project because it has the EAA.