A 5-year project has an initial fixed asset investment of $522,600, an initial net working capital...

A 5-year project has an initial fixed asset investment of $522,600, an initial net working capital investment of $13,200, and an annual operating cash flow of -$51,480. 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 15.8 percent. What is the project's equivalent annual cost, or EAC?

Expert Solution

EAC = NPV / Present value annuity factor

(EAC or the equivalent annual cost can be described as the present value of all costs divided by the present value annuity factor which is the sum of all discounting factors at a given rate for given number of years.)

Following is the excel sheet of the calculation of Equivalent Annual Cost :-

Following is the formula sheet of above excel worksheet for easy understanding of the formulas used:-

So, Project's Equivalent Annual cost = - $212428.54

jeff jeffy answered 2 years ago

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