Question

A project requires an investment of $15,000 today and it is expected to generate free cash flows of $5,000 per year for the next four years. The company’s weighted average cost of capital is 10.1% per year. What is the project’s equivalent annual annuity?

Answer 1

$1,838.45

Step-by-step explanation:

equivalent annual annuity (EAA) = (r x NPV) / [1 - (1 + r)⁻ⁿ]

first we must calculate the proejct's NPV using a financial calculator:

initial outlay -$15,000

payment = $5,000

nper = 4

r = 0.101

NPV = $5,815.08

EAA = (0.101 x $5,815.08) / [1 - (1 + 0.101)⁻⁴] = $587.32 / 0.31946 = $1,838.45