Question

A project has an initial outlay of $3,640. The project will generate cash flows of $4,565 in Years 1-5. What is the Equivalent Annual Annuity (EAA) of this project? Assume an interest rate of 11%.

Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. If your answer is negative, enter your answer as a negative number rounded off to two decimal points.

Answer 1

- Project's Initial outlay = $3,640

calculating the Net Present Value of project:-

Year	Cash Flow of Project ($) (a)	PV Factor @11%  (b)	Present Value of Project ($)  [(a)*(b)]
0	(3,640.00)	1.00000	(3,640.000)
1	4,565.00	0.90090	4,112.613
2	4,565.00	0.81162	3,705.056
3	4,565.00	0.73119	3,337.889
4	4,565.00	0.65873	3,007.107
5	4,565.00	0.59345	2,709.105
			13,231.77

So, NPV of Project is $13,231.77

Note- PV Factor@11% can be taken from PVAF Table or calculated using this formula which is = 1/(1+0.11)^n

where, n = Respective year.

For example, PV Factor@11% of 2nd year = 1/(1+0.11)^2 = 1/1.2321 = 0.81162

Calculating Equivalent Annual Annuity (EAA) of this project:-

where, r = Interest rate = 11%

n = no of years = 5

EAA = $3580.12

So, the Equivalent Annual Annuity (EAA) of this project is $3580.12

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