A five-year project has an initial fixed asset investment of $270,000, an initia

Question

A five-year project has an initial fixed asset investment of $270,000, an initial NWC investment of $22,000, and an annual OCF of $21,000. 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. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Equivalent annual cost $

Explanation / Answer

Year 0 1 2 3 4 5 Annual Operating Cash Outflow -21000 -21000 -21000 -21000 -21000 Initial Investment -270000 Investment in Net Working Capital -22000 22000 Total Operating Cash Flows -292000 -21000 -21000 -21000 -21000 1000 PV Factor @ 11% 1 0.9009 0.81162 0.73119 0.65873 0.59345 Total / NPV Present Value of Cash Flows -292000 -18918.9 -17044.02 -15355 -13833.33 593.45 -356557.79 NPV = -356557.79 Equivalent Annual Cost = NPV/ PVIF (11%,5) Equivalent Annual Cost = -356557.79/ PVIF (11%,5) Equivalent Annual Cost = -356557.79/3.69589 Equivalent Annual Cost = -96474.13

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