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MRM Inc. has additional cash available for investment. One of the production machines needs to be...

MRM Inc. has additional cash available for investment. One of the production machines needs to be replaced, and management is considering two options. Both options require a similar initial outlay and have a useful life of 10 years. Option #1 will generate $20,000 annually in positive after-tax cash flows and would have an after-tax residual value of $19,000. Option #2 will generate $19,000 annually in positive after-tax cash flows and would have an after-tax residual value of $20,000.

Using a discount rate of 9%, which option is the most attractive?

Select one or more:

a. Option #1

b. Option #2

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Answer #1

Present value = Present value of annual cash inflows + present value of residual value

Option 1 = 20000*6.4177 + 19000*0.4224 = $136380

Option 2 = 19000*6.4177 + 20000*0.4224 = $130384

Option #1 is more attractive.

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