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 $26,871.00 per year for 8 years and costs $99,126.00. The UGA-3000 produces incremental cash flows of $28,696.00 per year for 9 years and cost $125,695.00. The firm’s WACC is 8.83%. What is the equivalent annual annuity of the GSU-3300
| GSU-3300 | |||||||||
| Discount rate | 0.0883 | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
| Cash flow stream | -99126 | 26871 | 26871 | 26871 | 26871 | 26871 | 26871 | 26871 | 26871 |
| Discounting factor | 1 | 1.0883 | 1.184397 | 1.288979 | 1.402796 | 1.526663 | 1.661467 | 1.808175 | 1.967837 |
| Discounted cash flows project | -99126 | 24690.8 | 22687.5 | 20846.73 | 19155.316 | 17601.14 | 16173.05 | 14860.84 | 13655.1 |
| NPV = Sum of discounted cash flows | |||||||||
| NPV GSU-3300 = | 50544.47 | ||||||||
| Where | |||||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||||||
| Discounted Cashflow= | Cash flow stream/discounting factor | ||||||||
| Equvalent annuity(EAA)= | 9074.471548 | ||||||||
| Required rate = | 0.0883 | ||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
| Cash flow stream | 0 | 9074.472 | 9074.472 | 9074.472 | 9074.4715 | 9074.472 | 9074.472 | 9074.472 | 9074.472 |
| Discounting factor | 1 | 1.0883 | 1.184397 | 1.288979 | 1.402796 | 1.526663 | 1.661467 | 1.808175 | 1.967837 |
| Discounted cash flows project | 0 | 8338.208 | 7661.681 | 7040.045 | 6468.8462 | 5943.992 | 5461.722 | 5018.581 | 4611.395 |
| Sum of discounted future cashflows = | 50544.47 | ||||||||
| Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||||||
| Discounted Cashflow= | Cash flow stream/discounting factor | ||||||||
A firm is must choose to buy the GSU-3300 or the UGA-3000. Both machines make the...
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