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.
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Annual return