Question

"Consider the following cash flow and compute the equivalent annual worth at i = 12.5%. The cash flow for years 0 through 6 in dollars is: 24,000 -4,600 -4,600 -6,200 -9,300 -13,800 -21,800 The answer could be negative."

Answer 1

For ease of computation, we compute PW first.

PW ($) = 24,000 - 4,600 x P/F(12.5%, 1) - 4,600 x P/F(12.5%, 2) - 6,200 x P/F(12.5%, 3) - 9,300 x P/F(12.5%, 4) - 13,800 x P/F(12.5%, 5) - 21,800 x P/F(12.5%, 6)

= 24,000 - 4,600 x 0.8889 - 4,600 x 0.7901 - 6,200 x 0.7023 - 9,300 x 0.6243 - 13,800 x 0.5549 - 21,800 x 0.4933

= 24,000 - 4,088.94 - 3,634.46 - 4,354.26 - 5,805.99 - 7,657.62 - 10,753.94

= - 12,295.21

Therefore,

AW ($) = PW / P/A(12.5%, 6) = - 12,295.21 / 4.0538 = - 3,033.01

**Using P/F and P/A factor tables