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 $26,595.00 per year for 8 years and costs $99,519.00. The UGA-3000 produces incremental cash flows of $29,457.00 per year for 9 years and cost $125,017.00. The firm’s WACC is 7.14%. What is the equivalent annual annuity of the UGA-3000? Answer Format: Currency: Round to: 2 decimal places.

Answer 1

UGA-3000
Discount rate	7.140%
Year	0	1	2	3	4	5	6	7	8	9
Cash flow stream	-125017.000	29457.000	29457.000	29457.000	29457.000	29457.000	29457.000	29457.000	29457.000	29457.000
Discounting factor	1.000	1.071	1.148	1.230	1.318	1.412	1.513	1.621	1.736	1.860
Discounted cash flows project	-125017.000	27493.933	25661.689	23951.548	22355.374	20865.572	19475.054	18177.201	16965.840	15835.207
NPV = Sum of discounted cash flows
NPV UGA-3000 =	65764.42
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Equvalent annuity(EAA)=	10154.15
Required rate =	7.140%
Year	0	1	2	3	4	5	6	7	8	9
Cash flow stream	0.00	10154.15	10154.15	10154.15	10154.15	10154.15	10154.15	10154.15	10154.15	10154.15
Discounting factor	1.000	1.071	1.148	1.230	1.318	1.412	1.513	1.621	1.736	1.860
Discounted cash flows project	0.000	9477.456	8845.862	8256.358	7706.139	7192.589	6713.262	6265.878	5848.309	5458.567
Sum of discounted future cashflows =	65764.42
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor