Question

A project with a life of 7 has an initial fixed asset investment of $23,520, an initial NWC investment of $2,240, and an annual OCF of –$35,840. The fixed asset is fully depreciated over the life of the project and has no salvage value.

  

If the required return is 14 percent, what is the project's equivalent annual cost, or EAC?

Answer 1

Initial Investment = $23,520
Initial NWC Investment = $2,240
Annual OCF = -$35,840
Useful Life = 7 years
Required Return = 14%

Net Present Value = -$23,520 - $2,240 - $35,840 * PVFIA(14%, 7) + $2,240 * PVIF(14%, 7)
Net Present Value = -$23,520 - $2,240 - $35,840 * 4.288305 + $2,240 * 0.399637
Net Present Value = -$178,557.66432

Equivalent Annual Cost = Net Present Value / PVIFA(14%, 7)
Equivalent Annual Cost = -$178,557.66432 / 4.288305
Equivalent Annual Cost = -$41,638.28