CFA Level 1 Exam

3959 Questions

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Question No. 1

Ecodevelopment Company has two mutually exclusive construction projects to evaluate. Each type of project can be duplicated repeatedly in different geographic locations around the country, but each requires a very different set of assets to construct. Thus, Ecodevelopment uses the equivalent annual annuity method to evaluate such projects. Project type A costs $6 million initially and generates expected end-of-year cash flows of $3 million, $5 million, and then $10 million when it is sold after 3 years. Project type B costs $9 million initially and has projected end-of-year cash flows of $3, $3, $6, and $6 million in Year 1 through Year 4, and then $10 million in Year 5. The project types are equally risky and the firm's cost of capital is 12 percent. What is the EAA of the higher valued project type?

Choose the correct option from the given list.
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