A five-year project has an initial fixed asset investment of $295,000, an initia

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’s equivalent annual cost, or EAC?(Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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’s equivalent annual cost, or EAC?(Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

First we need to compute NPV of costs

PV of Annual OCF = annual OCF x PVIFA (5,12%)

                                    = -26,000 x 3.604776

                                    = -93724.18

NPV of costs= cost of asset + working capital – PV of annual OCF

                        =295,000 +27,000 – (-93724.18)

                        = 415,724.18

Equivalent annual cost EAC = NPV of costs/ PVIFA (5,12%)

                                                       = 415,724.18/ 3.604776

                                                    =115,325.94

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