Unequal Lives

The Perez 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 $11 million but realizes after-tax inflows of $5 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $13 million and realizes after-tax inflows of $3.5 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. The cost of capital is 14%.

By how much would the value of the company increase if it accepted the better machine? Enter your answer in millions. $ 5.6 million ( CORRECT)

What is the equivalent annual annuity for each machine? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places. ( THE ANWER IS NOT 1.12 or 1.21)

Machine A ???	$ million
Machine B .69	$ million (CORRECT)

Present Value of Costs

The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost, but low annual operating costs, and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 9%, and the projects' expected net costs are listed in the table:

	EXPECTED NET COST
Year	Conveyor	Forklift
0	-$500,000	-$200,000
1	-120,000	-160,000
2	-120,000	-160,000
3	-120,000	-160,000
4	-120,000	-160,000
5	-20,000	-160,000

What is the present value of costs of each alternative? Round your answers to the nearest dollar, if necessary. Enter your answers as a whole numbers. For example, do not enter 1,000,000 as 1 million. Method 1 $ Method 2 $