Define Capital recovery factor.
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The capital recovery factor (CRF) is a financial metric used to calculate the periodic payment required to recover the initial investment cost of a project or investment over its useful life, including both principal and interest. It represents the ratio of the annual payment to the initial investment amount and is often used in capital budgeting and project evaluation.
The calculation of the capital recovery factor is based on the present worth of an annuity formula, which accounts for the time value of money and the discount rate:
[ CRF = \frac{r(1+r)^n}{(1+r)^n – 1} ]
Where:
The capital recovery factor reflects the equivalent annual cost of financing the initial investment and is useful for comparing different investment options or financing alternatives based on their annualized costs. It helps decision-makers assess the affordability and financial viability of projects by determining the annual cash outflows required to cover the investment cost, including both capital repayment and interest expenses.