A is considering the purchase of two alternative machinery. Machine 1 has an expected life of 5 years, will cost Rs. 100 lacs, and will produce net cash flows of Rs.30 lacs per year. Machine 2 has a life of 10 years, will cost Rs.140 million, and will produce net cash flows of Rs.25 million per year. It plans to use the chosen machine for only 10 years. Inflation in operating costs, machinery costs, is expected to be zero, and the company’s cost of capital is 12%. Which machine is acceptable as the better project? What is the equivalent annual annuity cost for each machine and by this criterion, which machine is acceptable?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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. A is considering the purchase of two alternative machinery. Machine 1 has an expected life of 5 years, will cost Rs. 100 lacs, and will produce net cash flows of Rs.30 lacs per year. Machine 2 has a life of 10 years, will cost Rs.140 million, and will produce net cash flows of Rs.25 million per year. It plans to use the chosen machine for only 10 years. Inflation in operating costs, machinery costs, is expected to be zero, and the company’s cost of capital is 12%. Which machine is acceptable as the better project? What is the equivalent annual annuity cost for each machine and by this criterion, which machine is acceptable?

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