A project with a life of 5 has an initial fixed asset investment of $24,360, an initial NWC investment of $2,320, and an annual OCF of –$37,120. The fixed asset is fully depreciated over the life of the project and has no salvage value. |
If the required return is 8 percent, what is the project's
equivalent annual cost, or EAC?
|
CF0 | -26680 |
CF1 | -37120 |
CF2 | -37120 |
CF3 | -37120 |
CF4 | -37120 |
CF5 | -34800 |
NPV | -$173,310.44 |
EAC | -$43,406.72 |
CF0 = -24,360 - 2,320 = -26,680 and CF5 = -37,120 + 2,320 = -34,800
Using the NPV function in excel or calculator, we can calculate the present value of these cash flows with 8% discount rate.
NPV = -173,310,44
Now, EAC can be calculated using PMT function
N = 5, PV = -173,310.44, FV = 0, I/Y = 8% => Compute PMT = $43,406.72
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