Question

Faleye Consulting is deciding which of two computer systems to purchase. It can purchase state-of-the-art equipment (System A) for 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.
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, whose EAA = $

Answer 1

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

What is the EAA of a project?

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:

Data and Calculations:

                                                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