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?
A)-$158,491
B)-$152,309
C)-$147,884
D)-$145,509
E)-$142,212

Question

Quizplus · Accepted Answer

The correct answer is A because the EAC is -$158,491. The EAC is calculated as follows:EAC = (Initial investment + Initial NWC) * (A/P, i%, n) + Annual OCF * (P/A, i%, n)where:A/P = Annuity factorP/A = Present value factori = Required returnn = Project lifeIn this case, the initial investment is $306,600, the initial NWC is $29,200, the annual OCF is -$46,720, the required return is 15%, and the project life is 4 years.Plugging these values into the formula, we get:EAC = (306,600 + 29,200) * (0.3605) + (-46,720) * (2.0736)= -$158,491

A 4-Year Project Has an Initial Asset Investment of $306,600,and