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Unequal Lives Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 1 9 0
Unequal Lives
Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine which has a cost of $ a year expected life, and aftertax cash flows labor savings and depreciation of $ per year; and Machine which has a cost of $ a year life, and aftertax cash flows of $ per year. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components microprocessors used in the machines. Assume that Filkinss cost of capital is Should the firm replace its old knitting machine? If so which new machine should it use? By how much would the value of the company increase if it accepted the better machine? What is the equivalent annual annuity for each machine?
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