Equivalent annual annuity Corcoran Consulting is deciding which of two computer

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 $5,000 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 $6,000 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

should be chosen.

b. What is its EAA? Round your answer to the nearest cent.
$

I know system B should be chosen but can't figure out how to work the answer. Thanks

Explanation / Answer

NPV of systems at weighted average capital of 10%

System A = 6000 * PVAF( 10%,6years) - 20000

= 6000*4.3553 -20000 i.e 6132

System B = 6000*2.4869 - 10000 i.e 4921

Equivalent annual annuity system A = 6132/6 i.e 1022

Equivalent annual annuity system B = 4921/3 i.e 1640

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