Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available:

1)Machine A, which has a cost of $190,000, a 4-year expected life, and after-tax cash flows of $87,000 per year;

2) Machine B, which has a cost of $360,000, a 8-year life, and after-tax cash flows of $98,300 per year.

Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Companys cost of capital is 10%.

• Should the firm replace its old knitting machine?
• If so, which new machine should it use?
• What is the equivalent annual annuity for each machine?