A project with a life of 12 has an initial fixed asset investment of $21,420, an...

A project with a life of 12 has an initial fixed asset investment of $21,420, an initial NWC investment of $2,040, and an annual OCF of –$32,640. The fixed asset is fully depreciated over the life of the project and has no salvage value.

If the required return is 13 percent, what is the project's equivalent annual cost, or EAC?

Expert Solution

Sol:

Project's equivalent annual cost calculation below:

Year	Cash Flows	PV factor @13%	Discounted cash flows
0	-23460	1	-23460.00
1	-32640	0.8850	-28884.96
2	-32640	0.7831	-25561.91
3	-32640	0.6931	-22621.16
4	-32640	0.6133	-20018.72
5	-32640	0.5428	-17715.68
6	-32640	0.4803	-15677.60
7	-32640	0.4251	-13873.98
8	-32640	0.3762	-12277.86
9	-32640	0.3329	-10865.36
10	-32640	0.2946	-9615.36
11	-32640	0.2607	-8509.17
12	-30600	0.2307	-7059.60

Total discounted cash flows	-216141.36
PVIFA at 13% for 12 years	5.92

Project EAC	-36524.88

Therefore project's equivalent annual cost (EAC) will be -$36524.88

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jeff jeffy answered 2 years ago

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