In: Finance
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 $26,375.00 per year for 8 years and costs $98,451.00. The UGA-3000 produces incremental cash flows of $29,102.00 per year for 9 years and cost $126,860.00. The firm’s WACC is 8.77%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.
PLEASE SHOW USING FINANCIAL CALCULATOR
Equivalent annual annuity = r x NPV / [1- (1+r)-n ]
Equivalent annual annuity = .0877 x 48786 / [1- (1+.0877)-8 ]
Equivalent annual annuity = .0877 x 48786 / [1- (1+.0877)-8 ]
Equivalent annual annuity of GSU-300 = $8739.17
Where, NPV =Net Present Value i.e. 48,786
r =WACC i.e. 8.77%
n= no. of periods i.e. 8 years
Using financial calculator,
2nd Cashflow CF0 = -98,451 Enter
C01= 26375
F = 8
IY = 8.77%
CPT NPV = $48786
GSU-3300 | |||
Year | Cashflows | PV @ 8.77% | |
0 | $ -98,451 | $ -98,451 | |
1 | $ 26,375 | $ 24,248 | >26375/ (1+.0877)^1 |
2 | $ 26,375 | $ 22,293 | >26375/ (1+.0877)^2 |
3 | $ 26,375 | $ 20,496 | >26375/ (1+.0877)^3 |
4 | $ 26,375 | $ 18,843 | >26375/ (1+.0877)^4 |
5 | $ 26,375 | $ 17,324 | >26375/ (1+.0877)^5 |
6 | $ 26,375 | $ 15,927 | >26375/ (1+.0877)^6 |
7 | $ 26,375 | $ 14,643 | >26375/ (1+.0877)^7 |
8 | $ 26,375 | $ 13,462 | >26375/ (1+.0877)^8 |
NPV | $ 48,786 |
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