lugar industries is consider lugar industries is consider lugar industries is co

Question

lugar industries is consider lugar industries is consider lugar industries is consider III. Wiley's Wire Products is considering two same product. Machine A costs $12 million genachine 2 years, after which the machine repla cash inflows of $8.7 million for 3 after prices will remain the same in the future. chain and equivalent annual annuity approaches value to the company. (15 points) ring investing in two mutually exclusive machines that can produce and generates after-tax cash inflows of $9 million per year for must be replaced. Machine B costs $16 million but generates after-tax ears, after which the machine must be replaced. Assume that machine e. The cost of capital is 10 percent. Please use both replacement to decide which machine to choose to maximize the

Explanation / Answer

Calculation of Net Present Value

Machine A

Machine B

Equivalent Annual Annuity Approach

Decision: Machine A Should Replace because Equivalent Annual Annuity approach shows Lower Net Present Value compare to Machine B.

Year Cash flow PVF @ 10% DCF 0 -12,000,000 1 -12,000,000 1-2 9,000,000 1.7355 15,619,500 Net Present Value 3,619,500

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