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.

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).

Exercise

Using the equivalent annual annuity approach

Instructions