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 $10 million but realizes after-tax inflows of $4 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $15 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 10%. A. By how much would the value of the company increase if it accepted the better machine? B. What is the equivalent annual annuity for each machine?

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 $10 million but realizes after-tax inflows of $4 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $15 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 10%. A. By how much would the value of the company increase if it accepted the better machine? B. What is the equivalent annual annuity for each machine?

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

Section: Chapter Questions

Problem 1PS

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Courses/88945/quizzes/289708/take Van Nuys Company Year Cash Flow Cost of Capital 12% %24 (7,370) 24 1 4,000 (2,000) 24 24 4,000 (2,000) 24 4,000 24 (2,000) $4 4,000 24 (2,000) 5 $4 4,000 (2,000) 24 24 6. 4,000 24 (2,000)
The Lesseis Company has an opportunity to invest in one of two mutally exclusive machines that will produce a product the company will need for the next 8 years Machine A has an after-tax cost of $8 million but will provide after-tux inflows of $4.9 million per year for 4 years. If Machine A were replaced, its after-tax cost would be million $8.7 million due to inflation and its after-tax rash inflows would increase to $5,1 million due to production efficiencies. Machine B has an after-tax cost of $13.2 million and will provide after- tax inflows of $4,5 million for 8 years. per year If the WACC is 8%, which machine should be acquired? Enter your answers in millions, For example, on answer of $10, 550, 000 should be entered as 10.55. Do not rand intermediate calculations. Round your answers to two decimal places. millines millians, rather millions created by Machine Machine A is the better project and will increase the company's value by $ then the $ B.

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