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 $26,524.00 per year for 8 years and costs $100,921.00. The UGA-3000 produces incremental cash flows of $28,172.00 per year for 9 years and cost $125,191.00. The firm’s WACC is 7.78%. What is the equivalent annual annuity of the GSU-3300? Answer Format: Currency: Round to: 2 decimal places.

Answer 1

GSU-3300
Discount rate	7.780%
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	-100921.000	26524.000	26524.000	26524.000	26524.000	26524.000	26524.000	26524.000	26524.000
Discounting factor	1.000	1.078	1.162	1.252	1.349	1.454	1.568	1.690	1.821
Discounted cash flows project	-100921.000	24609.389	22832.983	21184.806	19655.600	18236.778	16920.373	15698.992	14565.775
NPV = Sum of discounted cash flows
NPV GSU-3300 =	52783.70
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Equvalent annuity(EAA)=	9108.60
Required rate =	7.780%
Year	0	1	2	3	4	5	6	7	8
Cash flow stream	0.00	9108.60	9108.60	9108.60	9108.60	9108.60	9108.60	9108.60	9108.60
Discounting factor	1.000	1.078	1.162	1.252	1.349	1.454	1.568	1.690	1.821
Discounted cash flows project	0.000	8451.106	7841.070	7275.070	6749.926	6262.689	5810.622	5391.188	5002.030
Sum of discounted future cashflows =	52783.70
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor