Consider the two mutually exclusive machines given in Table P 15.13.

The initial investment will be financed with 70% equity and 30% debt. The before-tax debt interest rate, which combines both short-term and long-term financing, is 10% with the loan to be repaid in equal annual installments over the project life. The equity interest rate (i_e, which combines the two sources of common and preferred stock, is 15%. The firm’s marginal income tax rate is 35%.
(a) Compare the alternatives using 1e 15%. Which alternative should be selected?

(b) Compare the alternatives using k. Which alternative should be selected?
(c) Compare the results obtained in parts (a) and (b).

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TABLE P15.13 Initial investment Service life Salvage value Annual O&M cost Annual revenues MACRS property Machine A $40,000 6 years $4,000 $8,000 $20,000 5 year Machine B $60,000 6 years $8,000 $10,000 $28,000 5 year