MJSProblem 10-17 Unequal Lives The Perez Company has the opportunity to invest i
ID: 2723290 • Letter: M
Question
MJSProblem 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.
Machine A $ million Machine B $ millionExplanation / Answer
NPV of A
NPV of B
Since the duration of both projects are different, the Equated annual factor need to be found
Cumulative PV factor for A = 3.3121
Equated annual cash flow of A = 2.59/3/3121 = $0.78 million
Cumulative PV factor for B = 5.7466
Equated annual cash flow for B = 3.24/5.7466 = $0.56 million
The equalent cash flow of A seems to be better and the value will increase by 0.78 - 0.56 = $0.22 million
Year Nature A PV @ 8% PV of A cash flow 0 Investment -9 1 (9.00) 1 Cash flow 3.5 0.92593 3.24 2 Cash flow 3.5 0.85734 3.00 3 Cash flow 3.5 0.79383 2.78 4 Cash flow 3.5 0.73503 2.57 NPV 2.59Related Questions
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