A five-year project has an initial fixed asset investment of $325,000, an initia

Question

A five-year project has an initial fixed asset investment of $325,000, an initial NWC investment of $33,000, and an annual OCF of $32,000. 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?

A five-year project has an initial fixed asset investment of $325,000, an initial NWC investment of $33,000, and an annual OCF of $32,000. 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?

Explanation / Answer

Initial fixed asset investment = $ 325000 / PVAF(5,11%)   

= $325000 / 3.696

= $87933

Equivalent annual cost = $87933 + $33000 + $32000

= $152933

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