The Equivalent Annual Benefit (EAB) converts a project's Net Present Value (NPV) into a series of equal annual cash flows over its life. This is achieved by dividing the NPV by the present value annuity factor (PVIFA) for the project's duration and discount rate.

The formula is: EAB = NPV / PVIFA

Where PVIFA = [1 - (1 + r)^-n] / r

Given:

NPV = $1,100

r = 8% (0.08)

n = 6 years

First, calculate the PVIFA:

PVIFA = [1 - (1.08)^-6] / 0.08 = [1 - 0.63017] / 0.08 = 4.6229

Then, calculate the EAB:

EAB = $1,100 / 4.6229 ≈ $237.95

Rounded to the nearest dollar, the EAB is $238.

A. $5,085: This is incorrect. It results from incorrectly multiplying the NPV by the annuity factor ($1,100 4.6229) instead of dividing.

C. $177: This is incorrect. This value does not correspond to the correct application of the EAB formula and may result from using an incorrect number of years or discount factor.

D. $693: This is incorrect. This value is not derived from the standard EAB calculation and likely stems from a computational error or misunderstanding of the annuity formula.

1. Brealey

R. A.

Myers

S. C.

& Allen

F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education. In Chapter 6

Section 6-4

"Choosing between Projects

" the text explains the equivalent annual annuity method. The formula is presented as EAA = Present Value / Annuity Factor.

2. Damodaran

A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). John Wiley & Sons. Chapter 6

"Project Analysis and Investment Decision Rules

" discusses the use of equivalent annuities to compare projects with unequal lives

defining the calculation as annuitizing the NPV.

3. MIT OpenCourseWare. (2008). 15.401 Finance Theory I

Fall 2008. Lecture Notes

Lecture 4: The NPV Rule and its Competitors. Massachusetts Institute of Technology. The lecture notes detail the process for comparing projects with different lives by calculating the Equivalent Annual Annuity (EAA) as NPV divided by the appropriate annuity factor. (Available at: ocw.mit.edu).