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 $25,103.00 per year for 8 years and costs $103,947.00. The UGA-3000 produces incremental cash flows of $28,698.00 per year for 9 years and cost $126,793.00. The firm’s WACC is 9.62%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.

Answer 1

Answer:$5,887.49

The Equivalent annual annuity(EAA) can be computed using the formula =r*NPV/1-(1+r)^-n

Or we can use the excel function =PMT()

Both will yield similar result

For GSU-3300

Here we have the initial outflow =$103,947.00

The inflows $25,103.00 per year for 8 years

The WACC =9.62%

First we compute the NPV

The NPV =PV of inflows -Initial Outflow

The NPV can be computed using the excel function =NPV()

The formula used =NPV(9.62%,B3:B10)+B2 we get NPV as $31,848.57

Now we can find Equivalent annual annuity using the excel formula =PMT(9.62%,8,-B11)

We get Equivalent Annual Annuity as $5,887.49

Using the formula

EAA =(.0962*31/848.57)/1-(1+.0962)^-8

we get EAA as $5,887.49

BS Book1 - Excel (Product Activation Failed) o X File Home Insert Page Layout Formulas Data Review View Developer Tell me what you want to do... ie Calibri 11 - A A pe Wrap Text Currency WE * Cut Copy Paste Format Painter Clipboard L Insert Delete Format Sign in & Share AutoSum - Fill - Sort & Find & Clear Filter - Select- Editing BI U A € Merge & Center $ - % +0.00 .00 0 Conditional Format as Cell Formatting Table Styles Styles Font Alignment Number Cells B12 : X =PMT(9.62%,8,-B11) A B с D E F H 1 K L M N Р Q R 1 Years 2 Year 0 3 Year 1 Cash Flow -103947 25103 25103 4 Year 2 5 Year 3 6 Year 4 7 Year 5 8 Year 6 9 Year 7 25103 25103 25103 25103 25103 10 Year 8 25103 $31,848.57 $5,887.49 11 NPV 12 EAA 13 14 15 16 17 18 19 20 21 22 23 24 25 Sheet1 Sheet2 + Ready 1 + 100%