S99NOONQ3.3
3.Consider project A and project B shown in
question #1. If you are going to pick one of them and repeat it
over the next 6 years, why would you have to use EAA to choose
between them? (2)
You would have to use Equivalent Annual Annuity analysis because they have different lives. That is, you would have to repeat project A three times over the next 6 years whereas you would only have to repeat project B two times. In order to figure-out which one is actually better, you have to put them on equal footing--per year. EAA does this by telling you what taking project A gives you on a smooth, equivalent annual basis, and likewise for B, then you can pick the one that gives you the most per year.