The manager of Eskom is evaluating the purchase of a new equipment for solar power. Two options are available. The first equipment costs R1 000 000 and will increase operating profits to R300 000 a year. The second equipment costs R1 500 000 and will increase operating profits to R450 000 a year. Both equipments have a life of 10 years after which there is no salvage value. For tax purposes, the company can depreciate the machines linearly. The cost of capital for Eskom is 12% and the marginal tax rate 30%. Using the Net Present Value criterion, which equipment (if any) should Eskom invest on?

Net present value of first equipment = - initial cost + PW of After tax Annual cash inflows Net present value of first equipment = - 1000000 + 240000*(P/A, 12%, 10) Net present value of first equipment = - 1000000 + 240000*5.65022

What is P/A? How did you get 5.65022?