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A project with a life of 10 has an initial fixed asset investment of $10,920, an...

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Finance

A project with a life of 10 has an initial fixed assetinvestment of $10,920, an initial NWC investment of $1,040, and anannual OCF of –$16,640. The fixed asset is fully depreciated overthe life of the project and has no salvage value.

  

If the required return is 9 percent, what is the project'sequivalent annual cost, or EAC?

Answer & Explanation Solved by verified expert
3.7 Ratings (446 Votes)

Statement showing Cash flows
Particulars Time PVF 9% Amount PV
Cash Outflows                                   -                          1.0000          (10,920.00)        (10,920.00)
Cash Outflows                                   -                          1.0000            (1,040.00)          (1,040.00)
Cash Outflows                            1.00                        0.9174          (16,640.00)        (15,266.06)
Cash Outflows                            2.00                        0.8417          (16,640.00)        (14,005.56)
Cash Outflows                            3.00                        0.7722          (16,640.00)        (12,849.13)
Cash Outflows                            4.00                        0.7084          (16,640.00)        (11,788.20)
Cash Outflows                            5.00                        0.6499          (16,640.00)        (10,814.86)
Cash Outflows                            6.00                        0.5963          (16,640.00)          (9,921.89)
Cash Outflows                            7.00                        0.5470          (16,640.00)          (9,102.65)
Cash Outflows                            8.00                        0.5019          (16,640.00)          (8,351.05)
Cash Outflows                            9.00                        0.4604          (16,640.00)          (7,661.52)
Cash Outflows = -16640 + 1040                          10.00                        0.4224          (15,600.00)          (6,589.61)
Present value of Cash Outflows     (118,310.52)
PVF for 3 Years                6.4177
EAC        (18,435.16)

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Transcribed Image Text

A project with a life of 10 has an initial fixed assetinvestment of $10,920, an initial NWC investment of $1,040, and anannual OCF of –$16,640. The fixed asset is fully depreciated overthe life of the project and has no salvage value.  If the required return is 9 percent, what is the project'sequivalent annual cost, or EAC?

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