Calculate the equivalent annual value.
Explanation of Solution
Equivalent cash flow (CF1) from year 1 to 3 is $5,000. Interest rate 1 (i1) is 10%. Time period 1 is 3 years. Cash flow (CF2) from year 4 to 5 is $7,000. Time period 2 (n2) is 5 years. Interest rate (i2) is 12%.
Present value (P) in year can be calculated as follows:
Present value is $21,322.58.
Equivalent annual value (A) can be calculated as follows:
Equivalent annual value is $5,6786.01.
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