Reference no: EM13812291
1. Johnson Jets is considering two mutually exclusive projects. Project A has an up-front cost of $122,000 (CF0 = -122,000), and produces positive after-tax cash inflows of $30,000 a year at the end of each of the next six years. Project B has an up-front cost of $60,000(CF0 = -60,000) and produces after-tax cash inflows of $20,000 a year at the end of the next four years. Assuming the cost of capital is 10.5%,
1. Compute the equivalent annual annuity of project A. Round the EAA to a whole dollar.
2. Compute the equivalent annual annuity of project B.
3. Decide which project to undertake, either Project A or Project B.
2. There are two alternative machines for a manufacturing process. Both machines have the same output rate, but they differ in costs. Machine A costs $20,000 to set up and $8,000 per year to operate. It must be completely replaced every 3 years, and it has no salvage value. Machine B costs $50,000 to set up and $2,160 per year to operate. It should last for 5 years and has no salvage value. The costs of two machines are shown below.
Machine A Machine B
Year 0: 2,000 Year 0: 50.000
Year 1: 8,000 Year 1: 2,160
Year 2: 8,000 Year 2: 2,160
Year 3: 8,000 Year 3: 2,160
Year 4: 0 Year 4: 2,160
Year 5: 0 Year 5: 2,160
Assuming the cost of capital is 10%,
1. Find the equivalent annual cost of Machine A.
2. Find the EAC of Machine B.
3. Based on the equivalent annual cost method, which machine do you recommend, Machine A or Machine B?
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