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Machines A and B are two mutually exclusive equipment choices for a manufacturing plant that is expected to last forever. Machine A has a 3-year
Machines A and B are two mutually exclusive equipment choices for a manufacturing plant that is expected to last forever. Machine A has a 3-year economic life and Machine B has a 2-year economic life. The cash flows associated with the two machines are given in the table low. Given an opportunity cost of capital of 20%, which machine would you choose based on the equivalent annual cash flows? Cash flows and cost of capital are in real terms.
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Machine | C0 | C1 | C2 | C3 |
A | -300 | 120 | 144 | 864 |
B | -200 | 180 | 432 |
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