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 $26,826.00 per year for 8 years and costs $99,019.00. The UGA-3000 produces incremental cash flows of $29,067.00 per year for 9 years and cost $123,381.00. The firm’s WACC is 7.47%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.

Please using excel and explain

Answer 1

For this question we will have to understand the concept of Equivalant Net Present Value (ENPV)

ENPV = NPV / Present Value annuity factor

The project with higher ENPV must be accepted

First of all we will calculate Net Present Value of of both the project

Then we will divide the NPV by presnt Value Annuity Facort (PVAF) to get ENPV

GSU-3300

Year	GSU-3300
0	-99,019.00
1-8 (A)	26,826.00
PVAF 7.47%,8 (B)	5.86
Present Value of 1-8 Year Cash Flow (A*B) = {C}	157,309
NPV (D)	58,289.95
ENPV (D/B)	9,940.22

UGA-3000

Year	UGA-3000
0	-123,381.00
1-9 (A)	29,067.00
PVAF 7.47%,9 (B)	6.39
Present Value of 1-9 Year Cash Flow (A*B) = {C}	185649.2845
NPV (D)	62,268.28
ENPV (D/B)	9,749.31

Since UGA-3000 has higher ENPV it should be accepted