A five-year project has an initial fixed asset investment of $340,000, an initia

Question

A five-year project has an initial fixed asset investment of $340,000, an initial NWC investment of $36,000, and an annual OCF of $35,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required return is 11 percent, what is this project’s equivalent annual cost, or EAC? (Negative amount should be indicated by a minus sign.) (PS: this question was asked and answered three times on Chegg but no one has come up with the correct equivalent annual cost yet)

Explanation / Answer

Initial Investment on Asset = $340000

Initial Net Working CApital = $36000

Annual Operating CAsh Flow = -$35000

Net CAsh Flow in Year 0 = 340000+36000 = $376000

Annual Opearting CAsh Flow per year for 5 years = -$35000

required rate = 11%

NPV = -376000+(-35000)/(1.11)^1+(-35000)/(1.11)^2+(-35000)/(1.11)^3+(-35000)/(1.11)^4+(-35000)/(1.11)^5

NPV = -376000+( -129356)

NPV = -$505356

Let Equivalent Annual Cost is x

x/1.11+x/(1.11)^2+x/(1.11)^3+x/(1.11)^4+x/(1.11)^5= -505356

x/1.11+x/1.23+x/1.37+x/1.52+x/1.69 = -505356

x = -105176

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