Complete data:
Year___AirplaneWeather __ Machine
0 _______–90 _________ –900
1 _______500 ___________550
2 _______600 ____ ______600
3 _____________________685
Answer:
Weather machine, because it has a higher equivalent annual cash flow.
Explanation:
Discount rate :
New airplane = 9% = 0.09
Weather machine = 39% = 0.39
Calculate the Equivalent annual cashflow of each :
Using the relation :
New airplane :
(-900+500/1.09) + (600/1.09^2) * 0.09 / (1-1/1.09^2)
(−900+500÷1.09+600÷1.09^2)×9%÷(1−1÷1.09^2)
= 36.2249
Equivalent Annual cashflow of Weather Machine=(−900+550÷1.39+600÷1.39^2+685÷1.39^3)×0.39÷(1−1÷1.39^3)
= 38.0828
Based on the result of the equivalent annual cashflow, the company should opt for investing in weather machine.
