Question

What is the equivalent annual annuity for a 4-yr project with the following cash flows and a discount rate of 9%?

Year	Cash Flow
0	(175,000)
1	45,000
2	55,000
3	65,000
4	85,000

What is the payback period for a project with the following cash flows:

Year	Cash Flow
0	(175,000)
1	45,000
2	55,000
3	65,000
4	85,000

What is the net present value for a project with the following cash flows and a discount rate of 9%?

Year	Cash Flow
0	(175,000)
1	45,000
2	55,000
3	65,000
4	85,000

Answer 1

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

=45000/1.09+55000/1.09^2+65000/1.09^3+85000/1.09^4

=$197984.8724

NPV=Present value of inflows-Present value of outflows

=$197984.8724-$175000

=$22984.87(Approx)

Equivalent annual annuity=[(rate*NPV)]/[1-(1+rate)^-time period]

=[($22984.87*0.09)]/[1-(1.09)^-4]

=(2068.63852/0.291574788)

=7094.71(Approx)

Year	Cash flows	Cumulative cash flows
0	(175000)	(175000)
1	45000	(130000)
2	55000	(75000)
3	65000	(10000)
4	85000	75000

Payback period=Last period with a negative cumulative cash flow+(Absolute value of cumulative cash flows at that period/Cash flow after that period).

=3+(10000/85000)=3.12 years(Approx).