Using the technique of equivalent annual cash flows and a discount rate of 7%,what is the value of the following project? $$\begin{array} { l l l l l l }
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\text { CF } & - 22 & 8 & 9 & 11 & 13
\end{array}$$
A)3.06
B)3.61
C)10.25
D)12.23

Question

Using the technique of equivalent annual cash flows and a discount rate of 7%,what is the value of the following project? $$\begin{array} { l l l l l l } 
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\text { CF } & - 22 & 8 & 9 & 11 & 13
\end{array}$$
A)3.06
B)3.61
C)10.25
D)12.23

Quizplus · Accepted Answer

To calculate the equivalent annual cash flows, we first need to calculate the present value of each cash flow using the discount rate of 7%. We can do this using the formula:

PV = CF/(1+r)^t

where CF is the cash flow, r is the discount rate, and t is the year.

Using this formula, we get the following present values:

PV of Year 0 CF: -22
PV of Year 1 CF: 7.48
PV of Year 2 CF: 7.79
PV of Year 3 CF: 9.06
PV of Year 4 CF: 10.04

To calculate the equivalent annual cash flows, we can use the formula:

EAC = PV*r/((1+r)^t-1)

Using this formula, we get an EAC of 3.61. Therefore, the best choice is B.

Using the Technique of Equivalent Annual Cash Flows and a Discount