Question

1.A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,376.00 to install, $5,146.00 to operate per year for 7 years at which time it will be sold for $7,155.00. The second, RayCool 8, costs $41,333.00 to install, $2,023.00 to operate per year for 5 years at which time it will be sold for $8,968.00. The firm’s cost of capital is 6.46%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes.

2.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 $24,969.00 per year for 8 years and costs $99,057.00. The UGA-3000 produces incremental cash flows of $28,762.00 per year for 9 years and cost $123,561.00. The firm’s WACC is 8.84%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.

3.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 $26,366.00 per year for 8 years and costs $98,324.00. The UGA-3000 produces incremental cash flows of $29,991.00 per year for 9 years and cost $123,592.00. The firm’s WACC is 8.77%. What is the equivalent annual annuity of the UGA-3000? Assume that there are no taxes.

Answer 1

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Answer 1
Particulars	AC360	RayCool 8	Note
Cost of Project	26,376.00	41,333.00	A
Annual O&M costs	5,146.00	2,023.00	B
Salvage Value	7,155.00	8,968.00	C
Life	7.00	5.00	D
Annuity factor at 6.46%	5.4923	4.1602	E
Present Value of Annual O&M costs	28,263.12	8,416.02	F=B*E
Present Value at 16%	0.6452	0.7313	G
Present Value of Salvage Value	4,616.41	6,557.88	H=C*G
Net Present Value	50,022.71	43,191.15	I=A+F-H
Equivalent annual cost	9,107.87	10,382.06	J=I/E
Equivalent annual cost of AC360 is less so it should be accepted.
Answer 2
Particulars	GSU-3300	UGA-3000	Note
Costs	99,057.00	123,561.00	K
Incremental cash flow	24,969.00	28,762.00	L
Net Cashflow	74,088.00	94,799.00	M=K-L
Life	8.00	9.00
Annuity factor at 8.84%	5.1675	5.5621	N
Net Present Value	382,848.31	527,281.67	O=M*N
Equivalent annual cost	74,088.00	94,799.00	P=O/N
Equivalent annual cost of GSU-3300 is less so it should be accepted.
Answer 3
Particulars	GSU-3300	UGA-3000	Note
Costs	98,324.00	123,592.00	Q
Incremental cash flow	26,366.00	29,991.00	R
Net Cashflow	71,958.00	93,601.00	S=Q-R
Life	8.00	9.00
Annuity factor at 8.77%	5.5824	6.0517	T
Net Present Value	401,701.91	566,446.51	U=S*T
Equivalent annual cost	71,958.00	93,601.00	V=U/T
Equivalent annual cost of GSU-3300 is less so it should be accepted.