Question
The Jackson Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the
The Jackson Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $14 million but realizes after-tax inflows of $6 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $15 million, includes a tariff of $2 million that will be passed to the firm, and realizes after-tax inflows of $4.5 million per year for 8 years, after which it must be replaced. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. If the cost of capital is 9 percent, which machine should the company use?
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