The Perez Company has the opportunity to invest in one of two mutually exclusive
ID: 2652727 • Letter: T
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 $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%.
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 $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
Machine A ___________$ million Machine B ___________$ millionExplanation / Answer
Working
NPV of Machine A = - 9 + 3.5*PVIFA(8%,4)
NPV of Machine A =- 9 + 3.5*3.312127
NPV of Machine A = $ 2.59 Million
Equivalent annual annuity for Machine A = NPV of Machine A/PVIFA(8%,4)
Equivalent annual annuity for Machine A = 2.59/3.312127
Equivalent annual annuity for Machine A = $ 0.78 Million
NPV of Machine B = - 14 + 3*PVIFA(8%,8)
NPV of Machine B = - 14 + 3*5.746639
NPV of Machine B = $ 3.24 Million
Equivalent annual annuity for Machine B = NPV of Machine B/PVIFA(8%,8)
Equivalent annual annuity for Machine B= 3.24/5.746639
Equivalent annual annuity for Machine B = $ 0.56 Million
Decision : Machine A is better than Machine B as its Equilvalent Annual benefiet is greater
Answer
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.
As value of the company increase if it accepted the better machine i.e Machine A
than value of the company increase = $2.59 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.
Machine A $ 0.78 million Machine B $ 0.56 millionRelated Questions
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