Question

A project with a life of 9 has an initial fixed asset investment of $22,260, an initial NWC investment of $2,120, and an annual OCF of –$33,920. The fixed asset is fully depreciated over the life of the project and has no salvage value.

  

If the required return is 11 percent, what is the project's equivalent annual cost, or EAC?

Answer 1

initial investment = 22260 + 2120 = 24380

NWC of 2120 will be recovered at the end of the project

so OCF form years 1 to 8 = -33920

in year 9 = -33920+2120 = -31800

we have to calculate NPV of all these cash flows using discount rate of 11%

NPV = -24380 - (33920 / 1.11) - (33920 / 1.11^2) - (33920 / 1.11^3) - (33920 / 1.11^4) - (33920 / 1.11^5)

- (33920 / 1.11^6) - (33920 / 1.11^7) - (33920 / 1.11^8) - (31800 / 1.11^9)

= -211368

EAC = NPV / PV of annuity factor

PV of annuity factor = PVIFA(n = 9 ; r = 11%) = 5.5370

EAC = -211368 / 5.5370

= -$38173.39(rounded to two decimals)