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

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A firm is must choose to buy the GSU-3300 or the UGA-3000. Bothmachines make the firm’s production process more efficient which inturn increases incremental cash flows. The GSU-3300 producesincremental cash flows of $25,088.00 per year for 8 years and costs$104,097.00. The UGA-3000 produces incremental cash flows of$27,444.00 per year for 9 years and cost $124,467.00. The firm’sWACC is 7.75%. What is the equivalent annual annuity of theGSU-3300?

A firm is must choose to buy the GSU-3300 or the UGA-3000. Bothmachines make the firm’s production process more efficient which inturn increases incremental cash flows. The GSU-3300 producesincremental cash flows of $26,762.00 per year for 8 years and costs$103,375.00. The UGA-3000 produces incremental cash flows of$29,533.00 per year for 9 years and cost $125,250.00. The firm’sWACC is 8.97%. What is the equivalent annual annuity of theUGA-3000?

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Answer & Explanation Solved by verified expert
3.6 Ratings (666 Votes)

GSU-3300
Discount rate 0.0775
Year 0 1 2 3 4 5 6 7 8
Cash flow stream -104097 25088 25088 25088 25088 25088 25088 25088 25088
Discounting factor 1 1.0775 1.161006 1.250984 1.3479355 1.452401 1.564962 1.686246 1.81693
Discounted cash flows project -104097 23283.53 21608.84 20054.61 18612.166 17273.47 16031.06 14878.02 13807.91
NPV = Sum of discounted cash flows
NPV GSU-3300 = 41452.6
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Equvalent annuity(EAA)= 7145.08
Required rate =   0.0775
Year 0 1 2 3 4 5 6 7 8
Cash flow stream 0 7145.075 7145.075 7145.075 7145.0749 7145.075 7145.075 7145.075 7145.075
Discounting factor 1 1.0775 1.161006 1.250984 1.3479355 1.452401 1.564962 1.686246 1.81693
Discounted cash flows project 0 6631.16 6154.209 5711.563 5300.7543 4919.494 4565.655 4237.267 3932.498
Sum of discounted future cashflows = 41452.6
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor

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