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?(Equivalent annual annuity?) Rib? & Wings-R-Us is considering the purchase of a new smoker oven for...
?(Equivalent annual annuity?) Rib? & Wings-R-Us is considering the purchase of a new smoker oven for cooking? barbecue, ribs, and wings. It is looking at two different ovens. The first is a relatively standard smoker and would cost $ 52,000 last for 9 ?years, and produce annual cash flows of $ 18,000 per year. The alternative is the? deluxe, award-winning? Smoke-alator, which costs $ 78,000 and, because of its patented humidity? control, produces the? "moistest, tastiest barbecue in the? world." The? Smoke-alator would last for 13 years and produce cash flows of $ 24,000 per year. Assuming a required rate of return of 11 percent on both? projects, compute their equivalent annual annuities (EAAs?).
Solutions
Expert Solution
| Discount rate | 11.0000% | ||
| Cash flows | Year | Discounted CF= cash flows/(1+rate)^year | Cumulative cash flow |
| (52,000.00) | 0 | (52,000.00) | (52,000.00) |
| 18,000.000 | 1 | 16,216.22 | (35,783.78) |
| 18,000.000 | 2 | 14,609.20 | (21,174.58) |
| 18,000.000 | 3 | 13,161.44 | (8,013.14) |
| 18,000.000 | 4 | 11,857.16 | 3,844.02 |
| 18,000.000 | 5 | 10,682.12 | 14,526.15 |
| 18,000.000 | 6 | 9,623.54 | 24,149.68 |
| 18,000.000 | 7 | 8,669.85 | 32,819.53 |
| 18,000.000 | 8 | 7,810.68 | 40,630.21 |
| 18,000.000 | 9 | 7,036.65 | 47,666.86 |
PV = 47,666.86, FV = 0, N = 9, rate = 11%
Use PMT function in Excel
EAA = 8,608.71
| Discount rate | 11.0000% | ||
| Cash flows | Year | Discounted CF= cash flows/(1+rate)^year | Cumulative cash flow |
| (78,000.00) | 0 | (78,000.00) | (78,000.00) |
| 24,000.000 | 1 | 21,621.62 | (56,378.38) |
| 24,000.000 | 2 | 19,478.94 | (36,899.44) |
| 24,000.000 | 3 | 17,548.59 | (19,350.85) |
| 24,000.000 | 4 | 15,809.54 | (3,541.30) |
| 24,000.000 | 5 | 14,242.83 | 10,701.53 |
| 24,000.000 | 6 | 12,831.38 | 23,532.91 |
| 24,000.000 | 7 | 11,559.80 | 35,092.71 |
| 24,000.000 | 8 | 10,414.24 | 45,506.95 |
| 24,000.000 | 9 | 9,382.19 | 54,889.14 |
| 24,000.000 | 10 | 8,452.43 | 63,341.57 |
| 24,000.000 | 11 | 7,614.80 | 70,956.37 |
| 24,000.000 | 12 | 6,860.18 | 77,816.55 |
| 24,000.000 | 13 | 6,180.34 | 83,996.89 |
PV = 83,996.89, FV = 0, N = 13 , rate =11%
use PMT funciton in Excel
EAA = 12,444.22
so the second one is better
jeff jeffy answered 2 years agoRelated Solutions
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