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Danford enterprises can invest in one of two mutually exclusive machines that will make a product it needs for the next 8 years. Machine C cost $ 15 million but realizes after-tax inflows of $4.7 million per year for 4 years, after which it must be replaced. Machine D cost $25 milion and realizes after-tax inflows of $5.6 million per year for 8 years. Based on the firm's cost of capital of 7 percent, the NPV of Machine D is $8,439,272, with an equivalent annual annuity (EAA) of $1,413,306 per year. Calculate the EAA of Machine C. Compare your result to that of Machine D and decided which to recommend.

Select one:

a. EAAc = $271,578; Purchase Machine D
b. EAAc= $154,052; Purchase Machine D
c. EAAc= $2,187,984; Purchase Machine C
d. EAAc= $308,105; Purchase Machine D
e. EAAc= $349,498; Purchase Machine D

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Collen Von
Collen VonLv2
28 Sep 2019

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10-17 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 $10 million but realizes after-tax inflows of $4 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $15 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 10%.

A. By how much would the value of the company increase if it accepted the better machine?

B. What is the equivalent annual annuity for each machine?

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 ___________$ million

1. Johnson Jets is considering two mutually exclusive projects. Project A has an up-front cost of $122,000 (CF0 = -122,000), and produces positive after-tax cash inflows of $30,000 a year at the end of each of the next six years. Project B has an up-front cost of $60,000(CF0 = -60,000) and produces after-tax cash inflows of $20,000 a year at the end of the next four years. Assuming the cost of capital is 10.5%,
1. Compute the equivalent annual annuity of project A. Round the EAA to a whole dollar.
2. Compute the equivalent annual annity of project B.
3. Decide which project to undertake, either Project A or Project B.

2. There are two alternative machines for a manufacturing process. Both machines have the same output rate, but they differ in costs. Machine A costs $20,000 to set up and $8,000 per year to operate. It must be completely replaced every 3 years, and it has no salvage value. Machine B costs $50,000 to set up and $2,160 per year to operate. It should last for 5 years and has no salvage value. The costs of two machines are shown below.

Machine A Machine B

Year 0: 2,000 Year 0: 50.000

Year 1: 8,000 Year 1: 2,160

Year 2: 8,000 Year 2: 2,160

Year 3: 8,000 Year 3: 2,160

Year 4: 0 Year 4: 2,160

Year 5: 0 Year 5: 2,160

Assuming the cost of capital is 10%,
1. Find the equivalent annual cost of Machine A.
2. Find the EAC of Machine B.
3. Based on the equivalent annual cost method, which machine do you recommend, Machine A or Machine B?

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