Unequal Lives The Perez Company has the opportunity to invest in one of two mutu
ID: 2616823 • Letter: U
Question
Unequal Lives
The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $9 million but realizes after-tax inflows of $3.5 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $14 million and realizes after-tax inflows of $3 million per year for 8 years, after which it must be replaced. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. The cost of capital is 8%.
Using the replacement chain approach to project analysis, by how much would the value of the company increase if it accepted the better machine? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million
What is the equivalent annual annuity for each machine? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
Machine A $ million Machine B $ millionExplanation / Answer
Statement showing equivalent annual benefits
Thus machine A should be purchased
Particulars Machine A Machine B Cost of machine -9000000 -14000000 PVIFA(8%,4 years) 3.312127 PVIFA(8%,8 years) 5.746639 Equivalent cost of initial cost( cost of machine/PVIFA) -2717287.109 -2436207 Annal cash inflow 3500000 3000000 Equivalent annual benefits 782712.8911 563793.38Related Questions
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