Question

# A firm is must choose to buy the GSU-3300 or the UGA-3000. Both machines make the...

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 \$24,784.00 per year for 8 years and costs \$104,094.00. The UGA-3000 produces incremental cash flows of \$28,017.00 per year for 9 years and cost \$123,395.00. The firm’s WACC is 9.54%. What is the equivalent annual annuity of the UGA-3000? Assume that there are no taxes.

equivalent annual annuity (EAA) = (r * NPV)/(1 - (1+r)^(-n))

Where:

r – Project discount rate (WACC)

NPV – The net present value of project cash flows

n – project life (in years)

For UGA-3000

r = 9.54%

 UGA-3000 Year Cashflow PV of cashflow 0 -1,23,395.00 -1,23,395.00 1 28,017.00 25,576.96 2 28,017.00 23,349.42 3 28,017.00 21,315.89 4 28,017.00 19,459.46 5 28,017.00 17,764.70 6 28,017.00 16,217.55 7 28,017.00 14,805.14 8 28,017.00 13,515.74 9 28,017.00 12,338.63 NPV 40,948.48

EAA = (9.54% * 40,948.48 )/ (1 - 1.0954^-9)

= \$6,980.83

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