Unequal Lives The Perez Company has the opportunity to invest in one of two mutu

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 $11 million but realizes after-tax inflows of $5 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $13 million and realizes after-tax inflows of $3.5 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 14%. 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. 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 Machine B

Explanation / Answer

ans A)

working for NPV and EAA as follows

$1,224,753

so the value of firm would increase by ($1224753 - $697584) = $527168

ans b.)

EAA for :-

machine a :- $1224753

machine b :- $697584

Machine A Year Cash Flow PV Factor @ 14% PV 0 ($11,000,000) 1 ($11,000,000) 1 $5,000,000 0.8772 $4,385,965 2 $5,000,000 0.7695 $3,847,338 3 $5,000,000 0.6750 $3,374,858 4 $5,000,000 0.5921 $2,960,401 NPV $3,568,562 PVIFA 2.9137 EAA

$1,224,753

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