Question

Saved Help Save A 11-year project has an initial fixed asset investment of $23,520, an initial NWC investment of $2,240, and an annual OCF of -$35,840. The fixed asset is fully depreciated over the life of the project and has no salvage value. Required: If the required return is 20 percent, what is the project's equivalent annual cost, or EAC? (Do not round your intermediate calculations.)

Answer 1

Solution :

The project's equivalent annual cost or EAC = - $ 41,723.56

= - $ 41,724 ( when rounded off to the nearest whole number )

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

22.11.2019 - Microsoft Excel XES HOME A B FILE PAGE LAYOUT FORMULAS DATA REVIEW VIEW INSERT C (2) Statement showing calculation of EAC of the Project Sl.No. Year Particulars Cash Flow PV Factor @ 20% Discounted Cash Flows (1) (3) = (1) * (2) 1 Annual OCF Year 1 $ 35,840.00 0.8333 $ -29,866.67 2 Annual OCF Year 2 $ -35,840.00 0.6944 $ -24,888.89 3 Annual OCF Year 3 $ -35,840.00 0.57871 $ -20,740.74 4 Annual OCF Year 4 $ -35,840.00 0.4823 $ -17,283.95 5 Annual OCF Year 5 $ -35,840.00 0.4019 $ -14,403.29 6 Annual OCF Year 6 $ -35,840.00 0.3349 $ -12,002.74 7 Annual OCF Year 7 $ -35,840.00 0.2791 $ - 10,002.29 8 Annual OCF Year 8 $ 35,840.00 0.2326 $ -8,335.24 9 Annual OCF Year 9 $ -35,840.00 0.1938 $ -6,946.03 10 10 Annual OCF Year 10 $ -35,840.00 0.1615 $ -5,788.36 11 Annual OCF Year 11 $ -35,840.00 0.1346 $ -4,823.63 11 Recoupment of Initial Net Working Capital $ 2,240.00 0.1346 $ 301.48 Total of discounted Annual OCFS =SUM(4:15) -154,780.36 Initial Fixed Asset Investment -23,520.00 Initial Investment in Net Working Capital -2,240.00 Net Total Cash Flows = SUM(G16:18) - 180,540.36 PVIFA at 20 % for 11 years =SUM(F4:F14) 4.3271 EAC = (16) / (17) = Net Total Cash Flows / PVIFA at 20% for 11 years -41,723.56