MJS333Problem 10-17 Unequal Lives The Perez Company has the opportunity to inves
ID: 2727325 • Letter: M
Question
MJS333Problem 10-17
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.
Note: Machine B = 0.56M is correct; & Machine A= 0.78 IS WRONG; please someone reply correct; I posting this same question second time to get correct answer.
Machine A $ million Machine B $ millionExplanation / Answer
Ans: Machine A Year Cash Flow PVAF 8% Net cash flow 0 -9000000 1 -9000000 1 3500000 0.9259 3240740.741 2 3500000 0.8573 3000685.871 3 3500000 0.7938 2778412.844 4 3500000 0.7350 2572604.485 NPV 2592443.94 Equivelent NPV= 2592444/3.3121 782719 Machine B Year Cash Flow PVAF 8% Net cash flow 0 -14000000 1 -14000000 1 3000000 0.9259 2777777.778 2 3000000 0.8573 2572016.461 3 3000000 0.7938 2381496.723 4 3000000 0.7350 2205089.558 5 3000000 0.6806 2041749.591 6 3000000 0.6302 1890508.881 7 3000000 0.5835 1750471.186 8 3000000 0.5403 1620806.654 NPV 3239916.831 Equivelent NPV= 3239916/5.7466 563797 Machine A is having more NPV so it should be adopted
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