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A project has the following cash flows. Assume an interest rate of 18%. What is the...

A project has the following cash flows. Assume an interest rate of 18%. What is the Equivalent Annual Annuity (EAA)?

Year Cash Flow
0 -$1,608
1 $609
2 $1,194
3 $1,018
4 $741

Solutions

Expert Solution

Project A
Discount rate 0.18
Year 0 1 2 3 4
Cash flow stream -1608 609 1194 1018 741
Discounting factor 1 1.18 1.3924 1.643032 1.9387778
Discounted cash flows project -1608 516.1017 857.5122 619.5862 382.19956
NPV = Sum of discounted cash flows
NPV Project A = 767.4
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Equvalent annuity(EAA)= 285.2723
Required rate =   0.18
Year 0 1 2 3 4
Cash flow stream 0 285.2723 285.2723 285.2723 285.27226
Discounting factor 1 1.18 1.3924 1.643032 1.9387778
Discounted cash flows project 0 241.7561 204.8781 173.6255 147.14026
Sum of discounted future cashflows = 767.4
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor

jeff jeffy answered 1 year ago
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