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dsp73
3 years ago
9

Rivian is considering an trucking assembly. The R1T assembly has an expected life of 5 years, will cost $95 million, and will pr

oduce net cash flows of $37 million per year. Inflation in operating costs and battery costs is expected to be zero, and the company's cost of capital is 10%. What is the equivalent annual annuity?
Business
1 answer:
svetoff [14.1K]3 years ago
6 0

Answer:

Rivian

The equivalent annual annuity is:

$28,053,400.

Explanation:

a) Data and Calculations:

R1T assembly investment cost = $95,000,000

Net cash flows = $37,000,000 per year

Cost of capital = 10%

Period of investment and annuity = 5 years

Annuity factor = 3.791

Present value of annuity = (3.791 * $37,000,000)/5

= 140,267,000/5

= $28,053,400

b) The net cash flows of $37 million per year will produce an annuity value of $28,053,400.  In comparison with the investment cost in the R1T assembly, the present value of the annuity is reasonable.

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