Question

Calculate the AE given a project with an outlay of -2000 and cash flows of 1500...

Calculate the AE given a project with an outlay of -2000 and cash flows of 1500 per year for 4 years. The discount rate is 0.11. The rate is given as a decimal (eg .12 is 12%). Answer to the nearest dollar. Do not enter the dollar sign.

How can I get the calculation for this, kindly please explain?

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Answer #1

Solution: Calculation of the Annual equivalent value:

Cost of the Project = $2000

Cash flows for 4 years = $1500

Calculation of Net Present Value at 11% Discounting Rate

Year

Cash Inflows

Df@11%

Present Value of Cash Inflows

1

1,500.00

0.900901

1,351.35

2

1,500.00

0.811622

1,217.43

3

1,500.00

0.731191

1,096.79

4

1,500.00

0.658731

988.10

Present Value of Cash Inflows

4,653.67

(-) Initial Investment

2,000.00

Net Present Value

2,653.67

Therefore, Annual equivalent value = Net Present Value / Annuity Factor

Annuity Factor = (1 - (1/(1.11)^4) / 0.11

= 3.10245

Annual equivalent value = 2653.67 / 3.10245

= $855.34

Therefore, Annual equivalent value of the Project is $855.34

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