Question

All $ amounts in this question are net after-tax cash flows. Your client plans to invest in a wind turbine. The electricity generated will be sold to Duke Energy.

Two alternative turbines are available, from which the client will select one. One is produced by GE Wind Energy, the other by Vestas (cash flows not provided). The GE turbine has an expected operating life of 8 years, the Vestas turbine 11 years. Assume that these are the "best lives" for each turbine. The expected cash flows from the GE turbine appear below. The client requires a 16% annual return.

A coworker notices that the lives of the two turbines differ and that the client could reinvest at the end of each life. To adjust for the different lives, you decide to evaluate using EAA (equivalent annual annuity) initially, even though EAA assumes that the projects can be duplicated exactly. What is the expected EAA for the GE Wind Energy turbine? (Answer to two decimal places)

Year 0 cash flow = -2.30 million
Year 1 cash flow = 618,000
Year 2 cash flow = 661,000
Year 3 cash flow = 690,000
Year 4 cash flow = 718,000
Year 5 cash flow = 728,000
Year 6 cash flow = 762,000
Year 7 cash flow = 776,000
Year 8 cash flow = 812,000

Answer 1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

PVIFA VALUE = TOTAL ALL PV FACTORS FROM YEAR 1 TO YEAR 8