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 $25,010.00 per year for 8 years and costs $99,984.00. The UGA-3000 produces incremental cash flows of $28,975.00 per year for 9 years and cost $123,069.00. The firm’s WACC is 9.63%. What is the equivalent annual annuity of the GSU-3300? Assume that there are no taxes.

Answer 1

The equivalent annual annuity of GSU-3300 = 6,520.30

Explanation :

The computation of the equivalent annual annuity of the GSU -3,300 is shown below:

As per the data given in the question,

For GSU-3300, Cash flow =$25,010

Time = 8 years

Cost = $99,984

For UGA-3300, Cash flow = $28,975

Time = 9 years

Cost $123,069

Based on this,

The equivalent annual annuity of GSU-3300 is

= -$99,984 × 9.63% ÷ {1 -1 ÷ (1 + 9.63%)^8} + $25,010

= 6,520.299

= 6,520.30