Question

A firm is must choose to buy the GSU-3300 or the UGA-3000. Both machines make the firm’s production process more efficient which in turn increases incremental cash flows. The GSU-3300 produces incremental cash flows of $25,088.00 per year for 8 years and costs $104,097.00. The UGA-3000 produces incremental cash flows of $27,444.00 per year for 9 years and cost $124,467.00. The firm’s WACC is 7.75%. What is the equivalent annual annuity of the GSU-3300?

A firm is must choose to buy the GSU-3300 or the UGA-3000. Both machines make the firm’s production process more efficient which in turn increases incremental cash flows. The GSU-3300 produces incremental cash flows of $26,762.00 per year for 8 years and costs $103,375.00. The UGA-3000 produces incremental cash flows of $29,533.00 per year for 9 years and cost $125,250.00. The firm’s WACC is 8.97%. What is the equivalent annual annuity of the UGA-3000?

Thanks!

Answer 1

GSU-3300
Discount rate	0.0775
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	-104097	25088	25088	25088	25088	25088	25088	25088	25088
Discounting factor	1	1.0775	1.161006	1.250984	1.3479355	1.452401	1.564962	1.686246	1.81693
Discounted cash flows project	-104097	23283.53	21608.84	20054.61	18612.166	17273.47	16031.06	14878.02	13807.91
NPV = Sum of discounted cash flows
NPV GSU-3300 =	41452.6
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Equvalent annuity(EAA)=	7145.08
Required rate =	0.0775
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	0	7145.075	7145.075	7145.075	7145.0749	7145.075	7145.075	7145.075	7145.075
Discounting factor	1	1.0775	1.161006	1.250984	1.3479355	1.452401	1.564962	1.686246	1.81693
Discounted cash flows project	0	6631.16	6154.209	5711.563	5300.7543	4919.494	4565.655	4237.267	3932.498
Sum of discounted future cashflows =	41452.6
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

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