A five-year project has an initial fixed asset investment of $305,000, an initia

Question

A five-year project has an initial fixed asset investment of $305,000, an initial NWC investment of $29,000, and an annual OCF of ?$28,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 10 percent, what is this project

A five-year project has an initial fixed asset investment of $305,000, an initial NWC investment of $29,000, and an annual OCF of ?$28,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 10 percent, what is this project

Explanation / Answer

PV = cash inflox/(1+i)^n, where i = 10% and n is the number of period.

To nd EAC, use n=5, r=.1, pv=-209,851.25, FV=0, and solve for PMT. You should
get EAC = PMT = 55,358.23

or formula can be PV/(1-(1+i)^-n)/i

where pv = -209,851.25, i = 0.1 or 10%, n= 5

solving the above equation we get 55,358.23

Year 0                           1 2 3 4 5 OCF                28,000          28,000          28,000          28,000          28,000 Fixed asset       (305,000) NWC          (29,000)          29,000 total       (334,000)                28,000          28,000          28,000          28,000          57,000 PV of cash flows       (334,000)                25,455          23,140          21,037          19,124          35,393 NPV       (209,851)

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