Explore BrainMass

Explore BrainMass

    Equivalent annual annuity for machines

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    The Perez Company has the opportunity to invest in on of the 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%. By how much would the value of the company increase if it accepted the better machine? What is the equivalent annual annuity for each machine?

    Need help with starting this problem.

    © BrainMass Inc. brainmass.com June 3, 2020, 10:29 pm ad1c9bdddf
    https://brainmass.com/business/the-time-value-of-money/equivalent-annual-annuity-machines-233715

    Solution Preview

    The answers are in attached file:
    Note:
    PVIFA= Present Value Interest Factor for an Annuity
    Read from the tables or calculate using the following equation
    PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
    The Perez Company has the opportunity to invest in on of the 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 ...

    Solution Summary

    Calculates the equivalent annual annuity for machines with unequal lives.

    $2.19

    ADVERTISEMENT