Question

This table will cover information for Q7-Q8 year CF project A CF project B 0 -1000 -800, 1 600 300, 2 700 300, 3 300, 4 400 With discount rate 7%. Q7: what is project B's NPV? Q8: what is annualized EAC (annualized  NPV) for project A?

Answer 1

Computation of Project B NPV

Year	Cash flow	Disc @ 7% [ 1/ ( 1+i)^n	Discounting factor	Discounted Cash flows
0	($800)	1/( 1.07)^0	1	($800.0000)
1	$300	1/( 1.07)^1	0.9346	$280.3738
2	$300	1/( 1.07)^2	0.8734	$262.0316
3	$400	1/( 1.07)^3	0.8163	$326.5192
		Total		$68.925

* NPV = PV of Cash inflows - Pv of Cash outflows

Hence Project B NPV is $ 68.925

Computation of EAC for Project A

Year	Cash flow	Disc @ 7% [ 1/ ( 1+i)^n	Discounting factor	Discounted Cash flows
0	($1,000)	1/( 1.07)^0	1	($1,000.0000)
1	$600	1/( 1.07)^1	0.9346	$560.7477
2	$700	1/( 1.07)^2	0.8734	$611.4071
3	$300	1/( 1.07)^3	0.8163	$244.8894
		Total	3.6243	$417.044

We know that EAC = NPV / PVAF factor

= $417.044/ PVAF ( 7%,3)

= $ 417.044/3.6243

= $ 115.07

Hence EAC for project A is $ 115.07

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