Owens Mills Corp. is considering producing two mutually exclusive machine types. Machine A requires an up-front expenditure at t = 0 of $450,000, it has an expected life of 2 years, and it will generate positive after-tax cash flows of $350,000 per year (all cash flows are realized at the end of the year) for 2 years. At the end of 2 years, the machine will have zero salvage value, but every two years the company can purchase a replacement machine with the same cost and identical cash inflows. Alternatively, it can choose Machine B, which requires an expenditure of $1 million at t = 0, has an expected life of 4 years, and will generate positive after-tax cash flows of $360,000 per year (all cash flows are realized at year end). At the end of 4 years, Machine B will also have an after-tax salvage value of $190,000. The cost of capital is 10%. Which machine should the Owens Mills choose? Show your EAA (equivalent annual annuity) Excel calculations to support your choice on Machine A vs. Machine B.
Owens Mills Corp. is considering producing two mutually exclusive machine types. Machine A requires an up-front expenditure at t = 0 of $450,000, it has an expected life of 2 years, and it will generate positive after-tax cash flows of $350,000 per year (all cash flows are realized at the end of the year) for 2 years. At the end of 2 years, the machine will have zero salvage value, but every two years the company can purchase a replacement machine with the same cost and identical cash inflows.
Alternatively, it can choose Machine B, which requires an expenditure of $1 million at t = 0, has an expected life of 4 years, and will generate positive after-tax cash flows of $360,000 per year (all cash flows are realized at year end). At the end of 4 years, Machine B will also have an after-tax salvage value of $190,000. The cost of capital is 10%. Which machine should the Owens Mills choose? Show your EAA (equivalent annual
NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision making on the basis of future cash inflow & outflow from the project. If the project provides the positive npv than project should be accepted and vice versa.
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