Question

_{What is the equivalent annual cost for a perpetuel project that requires a $400 inltial investment, and a $100 annual operating expense if the cost of capital is 10 percent? Show calculations.}

_{Multiple choice:}

_{1) 250$}

_{2) 165$}

_{3) 120$}

_{4) 200$}

_{5) 140$}

Answer 1

- Initial investment = $400

Annual Operating cost in perpetuity = $100

Present Value of Annual Operating cost in perpetuity = Annual Operating cost/Cost of capital

Present Value of Annual Operating cost in perpetuity = $100/10%

Present Value of Annual Operating cost in perpetuity= $1000

Total Present value of project = $400 + $1000 = $1400

So, Equivalent Annual cost of perpetual cashfow = Total Present value of project*Interest rate

= $1400*10%

Equivalent Annual cost of perpetual cashfow = $140

Option 5

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