Assume Buddy\'s Wacc is 11.5%, compare these projects using the equivalent annua

Question

Assume Buddy's Wacc is 11.5%, compare these projects using the equivalent annual cost method. Which project should be selected. Explain your decision No Salvage. B. Year Machine X Machine Y 0 ($600,000) ($380,000)
1 ($36,000) ($65,000)
2 ($36,000) ($65,000) 3 ($36,000) ($65,000)
4 ($36,000) ($65,000)
5 ($36,000) 6 ($36,000)
Assume Buddy's Wacc is 11.5%, compare these projects using the equivalent annual cost method. Which project should be selected. Explain your decision No Salvage. B. Year Machine X Machine Y 0 ($600,000) ($380,000)
1 ($36,000) ($65,000)
2 ($36,000) ($65,000) 3 ($36,000) ($65,000)
4 ($36,000) ($65,000)
5 ($36,000) 6 ($36,000)

Explanation / Answer

All amount is in (,000)

PV of Project X = 600+36*PVIFA(11.5,6)

or

PV ofProject X = 600+(36/1.115^1)+(36/1.115^2)+(36/1.115^3)+(36/1.115^4)+(36/1.115^5)+(36/1.115^6) = $750.13059

PV = $750130.59

NOw, EAC of Project X = PV of asset*WACC/(1-(1+WACC)^-time period) = 750130.59*.115/(1-1.115^-6) = $179874.75

PV of Project Y = 380+(65/1.115^1)+(65/1.115^2)+(65/1.115^3)+(65/1.115^4) = 579.52490

PV of project Y = $579524.90

EAC for Project Y = PV of asset*WACC/(1-(1+WACC)^-time period) v= 579524.90*.115/(1-1.115^-4) = $188794.08

Now, as seen EAC for Project X is less than EAC of Project Y, therefor Project X should be selected,

thank you

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