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 $26,412.00 per year for 8 years and costs $99,693.00. The UGA-3000 produces incremental cash flows of $27,892.00 per year for 9 years and cost $124,204.00. The firm’s WACC is 9.17%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.

Answer format: Currency: Round to: 2 decimal places.

Answer 1

SOLUTION:

The values provided in the question are as follows:

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

GSU-3300 produces incremental cash flows = $26,412.00 per year for 8 years

GSU-3300 costs = $99,693.00.

UGA-3000 produces incremental cash flows = $27,892.00 per year for 9 years

UGA-3000 cost = $124,204.00

Firm’s WACC=9.17% or 0.0917

Equivalent annual annuity of the GSU-3300 =?

Assume that there are no taxes.

CALCULATION OF NET PRESENT VALUE OF PROJECT OF GSU-3300 WHEN DISCOUNT RATE IS 9.17 %
Year	Inflow (a)	Discounting Factor (b ) = (1/1+r)^n	P.V. (c ) = (axb)
1	$26,412.00	0.9160	$24,193.39
2	$26,412.00	0.8391	$22,162.31
3	$26,412.00	0.7686	$20,300.26
4	$26,412.00	0.7040	$18,594.05
5	$26,412.00	0.6449	$17,033.10
6	$26,412.00	0.5907	$15,601.57
7	$26,412.00	0.5411	$14,291.53
8	$26,412.00	0.4956	$13,089.79
PRESENT VALUE OF INFLOW		5.5000	$145,266.00
NET PRESENT VALUE = PRESENT VALUE OF CASH INFLOW- PRESENT VALUE OF CASH OUTFLOW
NET PRESENT VALUE = $145,266.00 - $99,693.00
NET PRESENT VALUE of GSU-3300 =$45,573.00
CALCULATION OF EQUIVALENTANNUAL ANNUITY OF PROJECT OF GSU-3300
EQUIVALENT ANNUAL ANNUITY =NPV/ PVAF(9.17 %,8 years)
EQUIVALENT ANNUAL ANNUITY =$45,573.00/5.5000
EQUIVALENT ANNUAL ANNUITY OF PROJECT OF GSU-3300= $8,286.00
CALCULATION OF NET PRESENT VALUE OF PROJECT OF UGA-3000 WHEN DISCOUNT RATE IS 9.17 %
Year	Inflow (a)	Discounting Factor (b ) = (1/1+r)^n	P.V. (c ) = (axb)
1	$27,892.00	0.9160	$25,549.07
2	$27,892.00	0.8391	$23,404.18
3	$27,892.00	0.7686	$21,437.79
4	$27,892.00	0.7040	$19,635.97
5	$27,892.00	0.6449	$17,987.55
6	$27,892.00	0.5907	$16,475.80
7	$27,892.00	0.5411	$15,092.36
8	$27,892.00	0.4956	$13,823.28
9	$27,892.00	0.4540	$12,662.97
PRESENT VALUE OF INFLOW		5.9540	$166,068.97
NET PRESENT VALUE = PRESENT VALUE OF CASH INFLOW- PRESENT VALUE OF CASH OUTFLOW
NET PRESENT VALUE = $166,068.97 - $124,204.00
NET PRESENT VALUE of UGA-3000 =$41,864.97
CALCULATION OF EQUIVALENTANNUAL ANNUITY OF PROJECT OF UGA-3000
EQUIVALENT ANNUAL ANNUITY =NPV/ PVAF(9.17 %,9 years)
EQUIVALENT ANNUAL ANNUITY =$41,864.97/5.9540
EQUIVALENT ANNUAL ANNUITY OF PROJECT OF UGA-3000= $7,031.40