Question

N2 A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,464.00 to install, $5,028.00 to operate per year for 7 years at which time it will be sold for $6,983.00. The second, RayCool 8, costs $41,667.00 to install, $2,083.00 to operate per year for 5 years at which time it will be sold for $9,080.00. The firm's cost of capital is 5.43%. What is the equivalent annual cost of the RayCool87 Assume that there are no taxes Submit Answer format: Currency: Round to 2 decimal places A mis 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 $26,919.00 per year for 8 years and costs $100 205.00. The UGA-3000 produces incremental cash flows of $28,885.00 per year for 9 years and cost $126.171.00. The firm's WACC is 7,83% What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes Submit Answer format: Currency: Round to: 2 decimal places

Answer 1

Ques-2)

Calculating the NPV of RayCool8:-

Year	Cash Flows of Project RayCool8 ($ )	PV Factor @5.43%	Present Value of Project RayCool8 ($)
0	(41,667.00)	1.0000	(41,667.00)
1	(2,083.00)	0.9485	(1,975.72)
2	(2,083.00)	0.8996	(1,873.96)
3	(2,083.00)	0.8533	(1,777.45)
4	(2,083.00)	0.8094	(1,685.90)
5	(2,083.00)	0.7677	(1,599.07)
5	9,080.00	0.7677	6,970.51
			(43,608.59)

So, NPV of RayCool8 is -$43,608.59

Now, Calculating Equivalent Annual Cost(EAC) of RayCool8:-

where, r = cost of capital = 5.43%

NPV = -$43,608.59

n = no of years = 5

EAC = -$10,192.51

So, Equivalent Annual Cost is $10,192.51 (Note- Don't use (-) sign in answer as cost is always negative.)

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