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 $26,363.00 per year for 8 years and costs $102,625.00. The UGA-3000 produces incremental cash flows of $28,432.00 per year for 9 years and cost $124,415.00. The firm’s WACC is 7.71%. What is the equivalent annual annuity of the UGA-3000?

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

Answer 1

UGA-3000
Discount rate	7.710%
Year	0	1	2	3	4	5	6	7	8	9
Cash flow stream	-124415.000	28432.000	28432.000	28432.000	28432.000	28432.000	28432.000	28432.000	28432.000	28432.000
Discounting factor	1.000	1.077	1.160	1.250	1.346	1.450	1.561	1.682	1.812	1.951
Discounted cash flows project	-124415.000	26396.806	24507.294	22753.035	21124.348	19612.244	18208.378	16905.002	15694.924	14571.464
NPV = Sum of discounted cash flows
NPV UGA-3000 =	55358.49
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Equvalent annuity(EAA)=	8755.20
Required rate =	7.710%
Year	0	1	2	3	4	5	6	7	8	9
Cash flow stream	0.00	8755.20	8755.20	8755.20	8755.20	8755.20	8755.20	8755.20	8755.20	8755.20
Discounting factor	1.000	1.077	1.160	1.250	1.346	1.450	1.561	1.682	1.812	1.951
Discounted cash flows project	0.000	8128.492	7546.645	7006.448	6504.919	6039.290	5606.991	5205.636	4833.011	4487.059
Sum of discounted future cashflows =	55358.49
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor