The correct answer is: B. equivalent annual annuity
An equivalent annual annuity (EAA) is a method of comparing investments with different cash flow streams by converting them into a single stream of equal annual payments. This is done by calculating the present value of each investment’s cash flow stream and then dividing it by the number of years in the investment. The EAA is then used to compare the investments on an equal footing.
The EAA is a useful tool for comparing investments with different cash flow streams. It allows investors to compare the investments on an equal footing and to make an informed decision about which investment is the best for them.
The other options are incorrect because they do not accurately describe the approach in which the constant cash flow stream is equal to the initial cash flow stream.
- Option A, greater annual annuity method, is incorrect because it implies that the constant cash flow stream is greater than the initial cash flow stream. This is not always the case.
- Option C, lesser annual annuity method, is incorrect because it implies that the constant cash flow stream is less than the initial cash flow stream. This is not always the case.
- Option D, zero annual annuity method, is incorrect because it implies that the constant cash flow stream is zero. This is not always the case.