Equivalent annual annuity Corcoran Consulting is deciding which of two computer
ID: 2649488 • Letter: E
Question
Equivalent annual annuity
Corcoran Consulting is deciding which of two computer systems to purchase. It can purchase state-of-the-art equipment (System A) for $20,000, which will generate cash flows of $6,000 at the end of each of the next 6 years. Alternatively, the company can spend $10,000 for equipment that can be used for 3 years and will generate cash flows of $5,000 at the end of each year (System B).
a. If the company's WACC is 10% and both projects can be repeated indefinitely, which system should be chosen?
System -Select-ABItem 1 should be chosen.
b. What is its EAA? Round your answer to the nearest cent.
$
Explanation / Answer
Statement showing calculation of Present Value System A System B Particulars Time PVF@10% Amount PV Amount PV Cash Outflows - 1.00 (20,000.00) (20,000.00) (10,000.00) (10,000.00) PV of Cash Outflows (20,000.00) (10,000.00) Cash Inflows 1.00 0.9091 6,000.00 5,454.55 5,000.00 4,545.45 Cash Inflows 2.00 0.8264 6,000.00 4,958.68 5,000.00 4,132.23 Cash Inflows 3.00 0.7513 6,000.00 4,507.89 5,000.00 3,756.57 Cash Inflows 4.00 0.6830 6,000.00 4,098.08 Cash Inflows 5.00 0.6209 6,000.00 3,725.53 Cash Inflows 6.00 0.5645 6,000.00 3,386.84 PV of Cash Inflows 4.3553 26,131.56 12,434.26 NPV 6,131.56 2,434.26 Cumulative PVF 4.3553 2.4869 Equivalent Annual Amount 1,407.84 978.83 Time PVF WN 1.00 0.9091 1/1.10 2.00 0.8264 .9091/1.10 3.00 0.7513 .8264/1.10 4.00 0.6830 .7513/1.1 5.00 0.6209 .683/1.10 6.00 0.5645 .6209/1.10
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