Question

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Basics of Capital Budgeting Attempts:2 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 realizes after-tax infows of $3.5 million per year for 4 years. After 4 years, the machine must be years, after which it must be replaced. Assume that machine prices are not expected to rise because replaced. Machine B costs $14 million and realizes after-tax inflows of $3 mition per year for ination will be offset by cheaper components the machines, The ofcapital the replacement chain approach to project analysis, 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 deaimal places. milion 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 Machine B million miltion 2.0

Answer 1

Mutually exclusive Project: One Project shall be selected among all projects.

Hence select the Project with higher NPV

NPV = PV of cash Inflows - PV of cashoutflows

Computation of NPV:

Machine A Machine B Year PVF@8% Cashflow( Disc CF Cashflow Disc CF 10.9259 2 0.8573 3 0.7938 4 0.7350 5 0.6806 6 0.6302 기 0.5835 8 0.5403 0 1.00009.00(9.00(14.00(14.00) 2.78 2.57 2.38 2.21 2.04 1.89 1.75 1.62 3.24 3.50 3.50 3.50 3.50 3.24 3.00 2.78 2.57 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 4 1 2 3 NPV 2.59

By cinsidering the best case NPV, the value of company increase by 0.65M

Equibalent Annual Annuity = NPV / PVAF (r%, n Years)

Machine A Machine B Particulars NPV PVAF(896) Annual Annuity 2.59 3.31 0.78 3.24 5.75 0.56

Part information ( Life of machine is missed in question)

Pls comment the life of Machine B in Comment box, I will update the answer.