A five-year project has an initial fixed asset investment of $345,000, an initia

Question

A five-year project has an initial fixed asset investment of $345,000, an initial NWC investment of $37,000, and an annual OCF of -$36,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 12 percent, what is this project

A five-year project has an initial fixed asset investment of $345,000, an initial NWC investment of $37,000, and an annual OCF of -$36,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 12 percent, what is this project

Explanation / Answer

Initial investment in the project = -345,000 - 37,000 = -382,000

PV of OCF = -36,000 * (1-1/(1+12%)^5) / 12% = -129,771.94

As we recover NWC at end of project, PV of NWC = 37,000 / (1+12%)^5 = 20,994.79

Total NPV = -382,000 - 129,771.94 + 20,994.79 = -490,777.15

Let EAC be X

So X * (1-1/(1+12%)^5) / 12% = -490,777.15

Solving, we get X = EAC = -136,146.36

Answer: EAC = -136,146.36

Hope this helped ! Let me know in case of any queries.

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