Swanand

ahmadmadoff Wrote:
-------------------------------------------------------
> sdanalyst Wrote:
> --------------------------------------------------
> -----
> > I thought EAA assumes infinite replacement?
> Which
> > makes using an annuity possible?
>
> me 2...
>
> the other question i have is
> if your a firm and you have $100, wacc=10%
>
> you have only two mutaly exclusive investments
> invest 1, get 5 in a year
> invest 100, get 110 in a year
>
> do you invest 1, and return 99 to your investors
> since that creates a higher NPV ?
>
> ugh my silly brain, i come up with questions that
> keep me busy for hours, and they will never be
> tested !


I think if the projects cannot be repeated, you just take the one with the higher NPV. I don't think you can do EAA with non-repeating projects.

Concerning the 2nd question, I think it depends on what the circustances are. On a purely corporate finance NPV basis, your answer could be different than the "right" answer. The invest 1, get 5 back has a higher NPV than the invest 100 get 110, and since the WACC is 10%, the invest 100 get 110 back doesnt really make sense. Most likely the company can find something else to put the 99 towards other than a project (buy back stock, invest, etc).