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 $24,453.00 per year for 8 years and costs $100,693.00. The UGA-3000 produces incremental cash flows of $28,659.00 per year for 9 years and cost $125,955.00. The firm’s WACC is 9.72%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.

Please round to 2 decimal places

Answer 1

GSU-3000
Discount rate	0.0972
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	-100693	24453	24453	24453	24453	24453	24453	24453	24453
Discounting factor	1	1.0972	1.203848	1.320862	1.4492496	1.590117	1.744676	1.914259	2.100324
Discounted cash flows project	-100693	22286.73	20312.37	18512.91	16872.87	15378.12	14015.78	12774.14	11642.49
NPV = Sum of discounted cash flows
NPV GSU-3000 =	31102.4
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Equvalent annuity(EAA)=	5770.66
Required rate =	0.0972
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	0	5770.664	5770.664	5770.664	5770.664	5770.664	5770.664	5770.664	5770.664
Discounting factor	1	1.0972	1.203848	1.320862	1.4492496	1.590117	1.744676	1.914259	2.100324
Discounted cash flows project	0	5259.446	4793.516	4368.863	3981.8289	3629.082	3307.585	3014.569	2747.511
Sum of discounted future cashflows =	31102.4
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor