Question

A 4-year project has an initial asset investment of $306,600, and initial net working capital investment of $29,200, and an annual operating cash flow of -$46,720. The fixed asset is fully depreciated over the life of the project and has no salvage value. The net working capital will be recovered when the project ends. The required return is 15 percent. What is the project's equivalent annual cost, or EAC?

Answer 1

To calculate the EAC, use the formula EAC = C x PVAF. Substitute the values into the formulas to find the EAC.

Step-by-step explanation:

To calculate the equivalent annual cost (EAC), we need to find the present value of the net cash flows over the project's life. The formula for calculating the present value of an annuity is:

EAC = C x PVAF

Where:

C is the cash flow per period

PVAF is the present value annuity factor

In this case, the cash flow per period is the annual operating cash flow, which is -$46,720. The present value annuity factor can be calculated using the formula:

PVAF = (1 - (1 / (1+r)^n)) / r

Where:

r is the required return rate, which is 15% or 0.15

n is the number of periods, which is 4 years

By substituting the values into the formulas, we can calculate the EAC.