e. Unrelated to the new product, Cory is analyzing two mutually exclusive machines that will upgrade its manufacturing plant. These machines are considered average-risk projects, so management will evaluate them at the firm’s 10% WACC. Machine X has a life of 4 years, while Machine Y has a life of 2 years. The cost of each machine is $60,000; however, Machine X provides after-tax cash flows of $25,000 per year for 4 years and Machine Y provides after-tax cash flows of $42,000 per year for 2 years. The manufacturing plant is very successful, so the machines will be repurchased at the end of each machine’s useful life. In other words, the machines are “repeatable” projects. 1. Using the replacement chain method, what is the NPV of the better machine? 2. Using the EAA method, what is the EAA of the better machine?
e. Unrelated to the new product, Cory is analyzing two mutually exclusive machines that
will upgrade its manufacturing plant. These machines are considered average-risk
projects, so management will evaluate them at the firm’s 10% WACC. Machine X
has a life of 4 years, while Machine Y has a life of 2 years. The cost of each machine
is $60,000; however, Machine X provides after-tax cash flows of $25,000 per year for
4 years and Machine Y provides after-tax cash flows of $42,000 per year for 2 years. The
manufacturing plant is very successful, so the machines will be repurchased at the end
of each machine’s useful life. In other words, the machines are “repeatable” projects.
1. Using the replacement chain method, what is the NPV of the better machine?
2. Using the EAA method, what is the EAA of the better machine?
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