A five-year project has an initial fixed asset investment of $295,000, an initia
ID: 2637773 • Letter: A
Question
A five-year project has an initial fixed asset investment of $295,000, an initial NWC investment of $27,000, and an annual OCF of ?$26,000. 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 $295,000, an initial NWC investment of $27,000, and an annual OCF of ?$26,000. 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
Annual OCF from the Asset: 26,000
PV of OCF = 26,000 x 3.60475 = $93,723.50
PV of Working Capital = 27,000 x 0.567 = $15,309
Total = 109,032.50
NPV = 109,032.50 - 295,000 = $185,967.50
EAC = r x NPV / 1- (1+ r)-t
EAC = 0.12 x 185,967.50 / 1 - (1 + 0.12) -5
EAC = 22316.1 / 0.43257
EAC = $51,589.56
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