Unequal Lives The Perez Company has the opportunity to invest in one of two mutu
ID: 2716468 • 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%.
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
Working for Machine A $ Investment done 9000000 After Tax Inflows per year 3500000 No. of years 4 Cost of Capital 8% Net Present Value 24,00,411.06 Positive Net Present Value Working for Machine B $ Investment done 14000000 After Tax Inflows per year 3000000 No. of years 8 Cost of Capital 8% Net Present Value 29,99,922.99 Positive Net Present Value In case the Company adopts purchasing machine B instead of Machine A (which is undoubtedly the better option), the value of the Company would increase by 0.60 million USD Equivalent Annual Annuity for each Machine Net Present Value $ No. of years Annuity million $ Machine A 2400411.06 4 0.6 Machine B 2999922.99 8 0.4
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