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In: Finance

A firm is must choose to buy the GSU-3300 or the UGA-3000. Both machines make the...

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

Solutions

Expert Solution

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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