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Machines A and B are mutually exclusive and are expected to produce the following real cash flows: Cash Flows ($ thousands) Ce C1 C2 Сз Machine A -110 +120 +131 B -80 +90 +80 +70 The real opportunity cost of capital is 10% a. Calculate the NPV of each machine. (Enter your answers in dollars not in thousands. Round your answers to the nearest whole dollar amount.) Machine NPV $ A 125 $ В 81 b. Calculate the equivalent annual cash flow from each machine. (Enter your answers in dollars not in thousands. Round your answers to the nearest whole dollar amount.) Cash Flow Machine $ A 107 В 121

Answer 1

a. NPV of machine A

= - $ 110 + $ 120 / 1.10¹ + $ 131 / 1.10²

= $ 107 Approximately

NPV of machine B

= - $ 80 + $ 90 / 1.10¹ + $ 80 / 1.10² + $ 70 / 1.10³

= $ 121 Approximately

b. Equivalent Annual cash flow is computed as shown below:

Equivalent cash flow of machine A

= $ 107 / Present value annuity factor of 10% for 2 years

= $ 107 / 1.7355

= $ 62 Approximately

Equivalent cash flow of machine B

= $ 121 / Present value annuity factor of 10% for 3 years

= $ 121 / 2.4869

= $ 49 Approximately

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