Equal Annual Return Formula
Formula for Equal annual return has been given below. Equal annual return formula has been explained with an example.
Annual Return = = Present Cash flow Annuity Factor |
Equal Annual Return Formula Calculation
Equal return cash flows can be calculated by dividing the present cash outflow with annuity factor. It is important to remember that equal annual return is calculated with the help of annuity factor due to time value of money concept.
Equal Annual Return Formula Example
NPV or Present Value = 120,000
Period required for project = 5 Years
Rate of Return = 14%
Calculate equal return from project at required rate of return?
Solution
In first place we would calculate the annuity factor, and then with the help of that annuity factor, the annual equal return would be calculated.
Annuity Factor
= 1-(1.14)-3
.14
=2.3216
Annual Return
Annual Return = = Present Cash Flow
Annuity Factor
= 120,000/2.3216
=51,688
Objective of Equal Annual Return
Primary objective of calculating equal annual return is to compare mutually exclusive project with different project life. Equal annual return makes this comparison possible, and project with a high equal annual return is selected.
Equal Annual Return Example
Project A Project B
NPV 160,000 220,000
Period 3 4
Discount 6% 8%
Solution
Project A Project B
NPV 160,000 220,000
Annuity Factor 2.678 3.312
Equal Annual Return 59,746 66,425
Project B will be selected, because it is offering high amount of equal annual return.
No comments:
Post a Comment