Question

College GameDay is analyzing the costs of a new 3D camera system. This 4-year project has an initial asset investment of $391,492, and initial net working capital investment of $37,099, and an annual operating cash flow of -$54,592. The fixed asset is fully depreciated over the life of the project and has no salvage value. The net working capital will be recovered when the project ends. The required return is 15 percent. What is the project's equivalent annual cost (EAC) for the 3D camera system? Enter any cash outflows as negative numbers and expected inflows as positive numbers.

*please show work. thank you*

Answer 1

Please find below:

Year	0	1	2	3	4
Initial investment	(3,91,492)
Working capital	(37,099)				37,099
Annual operating cashflow		(54,592)	(54,592)	(54,592)	(54,592)
Total cashflow (A)	(4,28,591)	(54,592)	(54,592)	(54,592)	(17,493)
PV factor @ 15% (B)	1.00	0.87	0.76	0.66	0.57
NPV (A*B)	(4,28,591)	(47,471)	(41,279)	(35,895)	(10,002)
Total NPV					(5,63,239)
Equivalent annual cost (x)
		Equivalent annual cost (x)
		x = NPV / Annuity factor
		Annuity factor = (1-(1/(1+r)^n))/r
		r = 15%
		n = 4 years
		Annuity factor = 2.8550
		x = 5,63,239/2.8550
			1,97,282