Question

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 $11 million but realizes after-tax inflows of $5 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $13 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 14%. 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

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

Answer 1

Answer:

Machine A = $ 1.22 million

Machine B = $ 0.70 million

Explanation:

The Equivalent Annual Annuity of the machines is as follows

Machine A = $ 1.22 million

Machine B = $ 0.70 million

Thus the Machine A with a higher Equivalent Annual Annuity of $ 1.22 Million is the better machine.

If the company accepted the better machine which is Machine A, the value of the company increases by $ 3.57 Million (Which is the net total of discounted cash Inflows = Net Present value of Machine A)

See attached file for details.