Question
12-14: Unequal Lives Cotner Clothes Inc. Is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which
12-14: Unequal Lives Cotner Clothes Inc. Is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190, 000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87, 000per year Machine 360-6, which has a cost of $360, 000, a 6-year life, and after-tax cash flows of $98, 300 per year. Assume that both projects can be repeated. Knitting machine prices are not expected o rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Cotners WACC 14%. Using the replacement chain and EAA approaches, which model should be selected? Why?
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