A Small Manufacturer Is Considering Two Alternative Machines

question 64

Multiple Choice

A small manufacturer is considering two alternative machines.Machine A costs $1.0 million,has an expected life of 5 years,and generates after-tax cash flows of $350,000 per year.At the end of 5 years,the salvage value of the machine is zero,but the company will be able to purchase another Machine A at a cost of $1.2 million.The second Machine A will generate after-tax cash flows of $375,000 a year for another 5 years,at which time its salvage value will again be zero.Alternatively,the company can buy Machine B at a cost of $1.5 million today.Machine B will produce after-tax cash flows of $400,000 a year for 10 years,after which it will have an after-tax salvage value of $100,000.Assume that the cost of capital is 12%.Based on the equivalent annual annuity,if the company chooses the machine that adds the most value to the firm,by how much will the company's value increase per year?

• A)$792,286.54
• B)$347,802.00
• C)$140,227.71
• D)$61,557.88

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