A five-year project has an initial fixed asset investment of $315,000, an initia

Question

A five-year project has an initial fixed asset investment of $315,000, an initial NWC investment of $25,000, 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? (A negative answer 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 $315,000, an initial NWC investment of $25,000, 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? (A negative answer 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

Solution:

NPV= Present value of cash outflows- Present value of cash inflows

EAC= NPV/PVAF

Initial investment = $3,15,000

Initial NWC investment= $25,000

Total initial investment = 3,15,000+25000=3,40,000

Operating cash flows (annual) = -$35,000

Salvage value - Nil

Discount rate = 11%

NPV= 25,000(PVF,11%,5)-3,40,000*1-35000(PVAF,11%,5)

NPV= 25000*0.5934-3,40,000-35,000*3.6959

NPV=14,835-3,40,000-1,29,357= -$4,54,522

EAC= -$4,54,522/3.6959= -$1,22,980.06

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.