Question
Unequal Lives Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has
Unequal Lives
Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $87,000 per year; and Machine 360-6, which has a cost of $360,000, a 6-year life, and after-tax cash flows of $98,300 per year. Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines.
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Assume that Filkins' cost of capital is 14%. Calculate the two projects' NPVs. Round your answers to the nearest cent. Machine 190-3 $ Machine 360-6 $
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By how much would the value of the company increase if it accepted the better machine? Round your answer to the nearest cent. $
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What is the equivalent annual annuity for each machine? Round your answer to the nearest cent.
Machine 190-3 $ Machine 360-6 $
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