A five-year project has an initial fixed asset investment of $613,600, an initial net working capital investment of $22,200, and an annual operating cash flow of -$76,540. 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 11.7 percent. What is the project's equivalent annual cost, or EAC?
A) −$248,092.76
B) −$182,309.18
C) −$147,884.01
D) −$235,490.58
E) −$242,212.22

Question

Quizplus · Accepted Answer

The correct answer is A. The EAC is calculated as follows:EAC = - (Initial fixed asset investment + Initial net working capital investment) * (A/P,11.7%,5) - Annual operating cash flow * (P/A,11.7%,5)= - (613,600 + 22,200) * (0.15246) - (-76,540) * (3.60478)= - $248,092.76

A Five-Year Project Has an Initial Fixed Asset Investment of $613,600