Suppose a project has an initial investment cost of $40,000 with an annual operating profit of $8,500 profit for six years, what is the amount of equivalent annual net benefit of this project assuming a 6% discount rate?
Question
Suppose a project has an initial investment cost of 8,500 profit for six years, what is the amount of equivalent annual net benefit of this project assuming a 6% discount rate?
Solution
The equivalent annual net benefit (EANB) of a project is calculated by subtracting the equivalent annual cost (EAC) from the equivalent annual benefit (EAB).
First, we need to calculate the EAB. The EAB is the constant annual benefit that would result in the same present value of the benefits over the project's life as the actual varying benefits. The formula for EAB is:
EAB = PV / (P/A, i, n)
where:
- PV is the present value of the benefits,
- i is the discount rate, and
- n is the number of years.
In this case, the annual operating profit is the benefit, so the PV is 51,000.
So, EAB = $51,000 / (P/A, 6%, 6)
Next, we need to calculate the EAC. The EAC is the constant annual cost that would result in the same present value of the costs over the project's life as the actual varying costs. The formula for EAC is the same as for EAB, but with the PV being the initial investment cost:
EAC = $40,000 / (P/A, 6%, 6)
Finally, we calculate the EANB:
EANB = EAB - EAC
Unfortunately, I can't calculate the exact values because the (P/A, i, n) factor depends on specific financial tables or a financial calculator. However, you can calculate these values using a financial calculator or a spreadsheet software like Excel.
Once you have calculated the EAB and EAC, you can subtract the EAC from the EAB to get the EANB.
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