Question

25. please answer all questions round to 4 decimal places

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,455.00 to install, $5,130.00 to operate per year for 7 years at which time it will be sold for $6,941.00. The second, RayCool 8, costs $41,330.00 to install, $2,082.00 to operate per year for 5 years at which time it will be sold for $8,917.00. The firm’s cost of capital is 6.16%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,548.00 to install, $5,135.00 to operate per year for 7 years at which time it will be sold for $6,971.00. The second, RayCool 8, costs $41,800.00 to install, $2,115.00 to operate per year for 5 years at which time it will be sold for $9,029.00. The firm’s cost of capital is 5.06%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes.

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 $25,232.00 per year for 8 years and costs $104,695.00. The UGA-3000 produces incremental cash flows of $27,599.00 per year for 9 years and cost $126,254.00. The firm’s WACC is 9.79%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.

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 $25,825.00 per year for 8 years and costs $103,756.00. The UGA-3000 produces incremental cash flows of $27,104.00 per year for 9 years and cost $126,558.00. The firm’s WACC is 9.57%. What is the equivalent annual annuity of the UGA-3000? Assume that there are no taxes.

Answer 1

Solution to the FIRST QUESTION

Equivalent Annual Cost (EAC) of the AC360

Period	Annual Cash Flow ($)	Present Value factor at 6.16%	Present Value of Cash Flow ($)
1	-5,130	0.941974	-4,832.33
2	-5,130	0.887316	-4,551.93
3	-5,130	0.835829	-4,287.80
4	-5,130	0.787329	-4,039.00
5	-5,130	0.741644	-3,804.63
6	-5,130	0.698610	-3,583.87
7	1,811	0.658072	1,191.77
TOTAL		5.550774	-23,907.79

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= -$29,907.79 - $26,455

= -$50,362.79 (Negative)

Equivalent Annual Cost (EAC) of the AC360

Equivalent Annual Cost (EAC) of the AC360 = Net Present Value / [PVIFA 6.16%, 7 Years]

= -$50,362.79 / 5.550774

= -$9,073.11 (Negative)

“Hence, the Equivalent Annual Cost (EAC) of the AC360 will be -$9,073.11 (Negative)”

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.