A five-year project has an initial fixed asset investment of $310,000, an initial NWC investment of...

A five-year project has an initial fixed asset investment of $310,000, an initial NWC investment

of $30,000, and an annual OCF of -$29,000. The fixed asset is fully depreciated over the life

of the project and has no salvage value. If the required return is 11 percent, what is this

project’s equivalent annual cost, or EAC?

Expert Solution

Initial Fixed Asset Investment = $310,000
Initial NWC Investment = $30,000
Useful Life = 5 years
Annual OCF = -$29,000
Required Return = 11%

NPV = -$310,000 - $30,000 - $29,000 * PVIFA(11%, 5) + $30,000 * PVIF(11%, 5)
NPV = -$310,000 - $30,000 - $29,000 * 3.695897 + $30,000 * 0.593451
NPV = -$429,377.483

EAC = NPV / PVIFA(11%, 5)
EAC = -$429,377.483 / 3.695897
EAC = -$116,176.80

jeff jeffy answered 2 years ago

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