Question

A 6-year project has an initial fixed asset investment of $42,000, an initial NWC investment of $4,000, and an annual OCF of -$64,000. The fixed asset is fully depreciated over the life of the project and has no salvage value.

  

Required:

If the required return is 19 percent, what is the project's equivalent annual cost, or EAC? (Do not round your intermediate calculations.)

Answer 1

Year	Cash flows	PVF @19%	Present value
0	-46000	1.000	-46000.00
1	-64000	0.840	-53781.51
2	-64000	0.706	-45194.55
3	-64000	0.593	-37978.61
4	-64000	0.499	-31914.80
5	-64000	0.419	-26819.16
6	-60000	0.352	-21128.54
Present value of Outflows			-262817.17
Divide: Annuity factor f or 6 years at 19%			3.41
Equivalent Annual cost			-77072.48
Note: Working capital invested is taken as investment outflow in Year-0
Note: Working capital released is taken as inflow in Year-6