C company is considering two mutually exclusive machines. Machine A has an up-front cost of $120,000 and produces positive after-tax cash inflows of $55,000 a year at the end of each of the next six years.

Machine B has an up-front cost of $75,000 and produces after-tax cash inflows of $45,000 a year at the end of the next three years. After three years, machine B can be replaced at a cost of $77,000 (paid at t = 3). The replacement machine will produce after-tax cash inflows of $48,000 a year for three years (inflows received at t = 4, 5, and 6).

The companys cost of capital is 10.75 percent.

• By how much would the value of the company increase if it accepted the better machine?

• What is the equivalent annual annuity for each machine?