Question

A firm is evaluating an 8-year project that costs $200,000 and has annual net cash flows of $50,000 per year. The firm’s cost of capital is 13%. What is the equivalent annual annuity of the project ?

$4,992

$41,677

$8,323

$39,939

$91,677

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=50,000/1.13+50,000/1.13^2+50,000/1.13^3+50,000/1.13^4+50,000/1.13^5+50,000/1.13^6+50,000/1.13^7+50,000/1.13^8

=239938.515

NPV=Present value of inflows-Present value of outflows

=239938.515-200,000

=$39938.515

Equivalent annual annuity=[(Cost of capital*NPV)]/[1-(1+cost of capital)^-time period]

=[(39938.515*0.13)]/[1-(1.13)^-8]

=(5192.00695/0.623840138)

which is equal to

=$8323(Approx)