Using the equivalent annual annuity approach
Since the net present values of each project are not directly comparable given the different lifespans of each project, you will have to consider a different approach.
The equivalent annual annuity (EAA) approach allows us to compare two projects by essentially assuming that each project is an investment generating a flat interest rate each year (an annuity), and calculating the annual payment you would receive from each project, discounted to present value.
You can compute the EAA of each project using the .pmt(rate, nper, pv, fv) function in numpy.
The weighted average cost is available as wacc, and the net present values for projects 1 and 2 are available as npv_project1 and npv_project2.
This exercise is part of the course
Introduction to Financial Concepts in Python
Exercise instructions
- Calculate and print the EAA for project 1 (using 8 as the time period).
- Calculate and print the EAA for project 2 (using 7 as the time period).
Hands-on interactive exercise
Have a go at this exercise by completing this sample code.
import numpy as np
# Calculate the EAA for Project 1
eaa_project1 = np.pmt(rate=____, nper=____, pv=____, fv=0)
print("Project 1 EAA: " + str(round(eaa_project1, 2)))
# Calculate the EAA for Project 2
eaa_project2 = np.pmt(rate=____, nper=____, pv=____, fv=0)
print("Project 2 EAA: " + str(round(eaa_project2, 2)))