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Consider the following capital budgeting problem. The following two machines are mutually exclusive and the firm would keep reinvesting in whatever machine it buys. Machine

Consider the following capital budgeting problem. The following two machines are mutually
exclusive and the firm would keep reinvesting in whatever machine it buys. Machine A would
be reinvested every 4 years, machine B every 3 years. The cash flows associated with each
machine are tabulated as follows; all numbers are in thousand dollars; the relevant discount
rate is 10% for both machines.
Year Machine A Machine B
0-80-100
15260
35260
424
1.a Which of the two machines is the better investment project? Analyze the question under the
assumption that whatever machine the company buys has to be reinvested in perpetuity.
1.b Suppose A fits current technology, whereas machine B needs a one-time retooling for the company.
These one-off installation costs would be $10,000 today. What is the optimal investment decision
now?
1.c Suppose the investment opportunity described above lasts only for 24 years. Recalculate your
decision rule for questions 1.a and 1.b. What is the NPV of the optimal investment policy now

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