Question

For the cash flows shown below, determine the equivalent Annual value for all six years.

Note: Consider at least three digits in your calculations, and answers 18.302.

Year	1	2	3	4	5	6
Net Profit, $	4000	5000	5000	5000	5000	4000
Annual Rate, %	8	7	7	7	7	15

Answer 1

PW of a cash flow at time t = CFt / (1+annual rate)^t

Year	Net Profit	Annual Rate (%)	PW
1	4000	8%	3703.70
2	5000	7%	4367.19
3	5000	7%	4081.49
4	5000	7%	3814.48
5	5000	7%	3564.93
6	4000	15%	1729.31
			21261.10

Equivalent Annual Value, A = ?

P = PW = 21261.10

i = average of interest rate = 8.50%

n = 6 years

Using the above formula,

A = 4669.09