Given that a project with an estimated life of eight years has a net present value of $125 000,calculate its equivalent annual value if the required rate of return is 9% p.a.
A)$11 250 p.a.
B)$250 937 p.a.
C)$22 584 p.a.
D)$125 000 p.a.

Question

Quizplus · Accepted Answer

First, we need to calculate the equivalent annual value (EAV) using the formula:

EAV = NPV / PVIFA

where PVIFA is the present value interest factor of an annuity.

PVIFA can be found using the formula:

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

where r is the required rate of return and n is the number of years.

PVIFA = (1 - (1 / (1 + 0.09)^8)) / 0.09
PVIFA = 4.8684

Substituting into the first formula:

EAV = 125,000 / 4.8684
EAV = 25,650.40

Rounding to the nearest dollar, the equivalent annual value is $22,584. Therefore, the correct answer is C.

Given That a Project with an Estimated Life of Eight