What is the equivalent annual annuity for each machine

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Reference no: EM131511466

Seeing the success of its current Smart watch product, Shao Corporation has decided to continue producing the current model for at least four more years, which calls for a need to add a new equipment. There are two options: Machine A has an up-front cost of $45,000 and produces positive after-tax cash inflows of $15,000 a year at the end of each of the next four years. Machine B has an upfront cost of $55,000 and produces after-tax cash inflows of $33,000 a year at the end of the next two years. After two years, the machine could be replaced at the same cost and generate same future cash flows. The company's cost of capital is 10.5%.

A. On a common life basis, which option would create more NPV to the company?

B. What is the equivalent annual annuity (EAA) for each machine? Based on your EAA analysis, which machine would you recomment?

C. Is your recommendation in part a the same as in part b? Using 1-2 sentances briefly explain why.

Reference no: EM131511466

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