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 $24,476.00 per year for 8 years and costs $99,595.00. The UGA-3000 produces incremental cash flows of $29,567.00 per year for 9 years and cost $123,688.00. The firm’s WACC is 7.70%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.

Answer 1

We can calculate the present value of future cashflows using =pv function of excel.

=Pv(.077,8,24476) = 142270.30

Ignore the negative excel shows as we should pay 142270.3 to get those cash inflows every year.

Now npv = 142270.3-99595 = 42675.3

Now we use =pmt function of excel to get equivalent annual annuity. Just ignore negative sign again for logic given above.

Basically the equation being solved is

42675.3 = x/(1.077) + x/(1.077^2) + ... + x/(1.077^8)

=Pmt(0.077,8,42675.3)

=7341.80

Thus equivalent annual annuity for GSU 3300 is 7341.80 dollars