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soldier1979 [14.2K]
2 years ago
6

Faleye Consulting is deciding which of two computer systems to purchase. It can purchase state-of-the-art equipment (System A) f

or an after-tax cost of $19,000, which will generate after-tax cash flows of $6,000 at the end of each of the next 6 years. Alternatively, the company can purchase equipment with an after-tax cost of $13,000 that can be used for 3 years and will generate after-tax cash flows of $6,000 at the end of each year (System B). If the company’s WACC is 10% and both “projects” can be repeated indefinitely, which system should be chosen, and what is its EAA? Do not round intermediate calculations. Round your answer to the nearest cent.
Choose Project
-Select-
, whose EAA = $
Mathematics
1 answer:
klemol [59]2 years ago
4 0

If Faleye Consulting’s WACC is 10% and both “projects” can be repeated indefinitely, the system that should be chosen is <u>System A</u>, and its EAA is <u>$2,866.91</u>.

<h3>What is the EAA of a project?</h3>

The EAA of a project is the Equivalent Annual Annuity.  The EAA can be determined using the following formula.

EAA = r x NPV1 - (1 + r)-n

Where the EAA = Equivalent Annual Annuity

r = interest rate per period

n = project duration

NPV = Net present value of project

We can also compute the EAA by using an online finance calculator as follows:

<h3>Data and Calculations:</h3>

                                                System A        System B

After-tax cost                           $19,000         $13,000

After-tax cash flows                 $6,000           $6,000

Equipment duration                 6 years           3 years

WACC = 10%

Annuity factor                            4.355              2.487

Present value of cash flows $26,130          $14,922 ($6,000 x 2.487)

NPV                                          $7,130           $1,922 ($14,922 - $13,000)

EAA (an online calculator)    $2,866.91        $800.966

Thus, using the EAA rule, the computer system that should be chosen is System A because it has a higher EAA than System B.

Learn more about the equivalent annual annuity at brainly.com/question/20566589

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