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Ling's Inc is considering two mutually exclusive machines. Machine A has an up-front cost of $100,000 (CF0 =-100,000), and produces positive after-tax cash inflows of
Ling's Inc is considering two mutually exclusive machines. Machine A has an up-front cost of $100,000 (CF0 =-100,000), and produces positive after-tax cash inflows of $40,000 a year at the end of each of the next six years. Machine B has an up-front cost of $50,000(CFO50,000) and produces after-tax cash inflows of $30,000 a year at the end of the next three years. After three years, machine B can be replaced at a cost of $55,000 (paid att 3). The replacement machine will produce after- tax cash inflows of $32,000 a year for three years (inflows received at t 4, 5, and 6) The company's cost of capital is 10.5 percent. What is the net present value (on a six-year extended basis) of the most profitable machine? (Hint: use replacement chain method. Compute NPVs for both projects to determine which one is the most profitable) A) $41,656 B) $71,687 C) $86,238 D) $62,456
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