The Perez Company has the opportunity to invest in one of two mutually exclusive

Question

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 $8 million but realizes after-tax inflows of $4.5 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $17 million and realizes after-tax inflows of $4.5 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 13%. PLEASE DO NOT COPY ANSWER FORM OTHER POSTED. iT IS DIFFERENT.

a) 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?

b) 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.

$   million???

$   million???

Explanation / Answer

The Perez Company All Amounts in $ a) To find out by what amount would the value of the Company increase, we need to calculate the Net Present Value of both the machines Based on the information given, the Net Present Value or NPV of Machine A is $ 4.77 million Machine B is $ 4.07 million Thus if it accepted the better machine viz. Machine A, the value of the Company would increase by $ 4.77 - $ 4.07 = $ 0.70 million. b) Equivalent Annual Annuity for each machine, based on the information given, works out to For Machine A $ 1.60 million For Machine B $ 0.85 million

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