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 $25,572.00 per year for 8 years and costs $104,003.00. The UGA-3000 produces incremental cash flows of $28,091.00 per year for 9 years and cost $123,535.00. The firm’s WACC is 8.49%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.
Statement showing equivalent annual annuity of GSU-3300
| Particulars | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | Total |
| Initial cost | -104003 | |||||||||
| Incremental cash flow | 25572 | 25572 | 25572 | 25572 | 25572 | 25572 | 25572 | 25572 | ||
| Total cash flow | -104003 | 25572 | 25572 | 25572 | 25572 | 25572 | 25572 | 25572 | 25572 | |
| PVIF @ 8.49% | 1 | 0.9217 | 0.8496 | 0.7831 | 0.7218 | 0.6654 | 0.6133 | 0.5653 | 0.5211 | |
| PV | -104003 | 23570.84 | 21726.28 | 20026.06 | 18458.90 | 17014.38 | 15682.90 | 14455.62 | 13324.38 | 40256.36 |
| PVIFA @ 8.49% | 5.6413 | |||||||||
| equivalent annual annuity (40256.36/5.6413) |
7136.01 |
Thus equivalent annual annuity of GSU-3300 = 7136.01$
Get Answers For Free
Most questions answered within 1 hours.