ACCA Financial Management (F9) Certification Practice Exam

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Prepare for the ACCA Financial Management (F9) Certification Exam with engaging quizzes and interactive content. Dive deep into financial management concepts and boost your exam confidence with questions that come with detailed explanations.

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What does Equivalent Annual Benefit (EAB) represent?

The annual cash inflow expected from cost savings
The applicant's net present value of an investment expressed annually
The annual annuity with the same value as the net present value of an investment project
A method of calculating ongoing project costs

The correct answer is: The annual annuity with the same value as the net present value of an investment project

Equivalent Annual Benefit (EAB) represents the annual annuity that has the same present value as the net present value (NPV) of an investment project. This concept allows for the comparison of projects that have different cash flows over time by converting the total value of the project's cash flows—expressed as NPV—into an equivalent uniform annual amount. By calculating the EAB, one can make meaningful comparisons when evaluating projects with varying timelines or cash flow patterns. This annual amount simplifies the assessment of long-term projects by representing their profitability or benefit on an annual basis, making it easier to compare them with other investment opportunities or against the cost of capital. The other options focus on aspects that do not correctly align with the definition of EAB. For example, while annual cash inflows from cost savings may contribute to overall project value, they do not encapsulate the essence of EAB, which is more about translating NPV into an annualized figure.