Reference no: EM133076129

XYZ manufacturing company is planning to purchase new equipment. It is deciding between 2 options: Machine 1 and Machine 2. Machine 1 has a 7-year working lifespan, while Machine 2 has a 5-year working lifespan. Cash flows are provided for each machine. The final cash-flow includes the residual value of the machine.

a) Calculate the NPV of both machines using a 10% discount rate.  Which machine has the highest NPV?  (Copy and paste the tables into the answer panel and populate)

Machine 1

Year	Net Cash Flow ($)	Discount Factor	Discounted Cash Flow
0	-400000
1	70,000
2	72,000
3	36,000
4	81,000
5	87,000
6	53,000
7	219,000
		NPV	$

Machine 2

Year	Net Cash Flow ($)	Discount Factor	Discounted Cash Flow
0	-300000
1	70,000
2	75,000
3	80,000
4	40,000
5	142,500
		NPV

b) You are not entirely comfortable comparing the two machines based on NPV due to their different lifespans, so you decide to compare them using Equivalent Annual Annuity (EAA).  The equivalent annual annuity formula is used in capital budgeting to show the net present value of an investment as a series of equal cash flows for the length of the investment. It provides a way to factor in the length of an investment. Using the EAA formula, calculate the equivalent annual annuity for the two machines. Based on this measure, which machine is better?    (Show your working)

Machine 1 EAA =

Machine 2 EAA =