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Hi sir,
May I know why to obtain EAC, the NPV of the machine cycle has to be divided by the PV annuity factor and not simply by it’s useful life?
Is this due to the cost of capital involved?Really confuse here thanks so much for helping!
Hi sir,
I have another question on delayed cash flows. Example: cash inflow that is recieved at year 3 instead of year 1.
Why would dividing the NPV of the cash flow by the PV table(year 2) get you the answer?
I understand how to use the method to get the answer but I do not know why is it like this.
Thanks!
In response to your first question – yes, it is due to interest. Simply dividing by the life of the machine would be ignoring the time value of money.
You should watch the free lecture on this where I explain in detail exactly why we divide by the annuity factor.
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