Question
UNOwhat Corp. is considering adopting one of two machines. Machine A requires an up-front expenditure at t=0 of $630,000. Machine A has an expected life
UNOwhat Corp. is considering adopting one of two machines. Machine A requires an up-front expenditure at t=0 of $630,000. Machine A has an expected life of two years, and will generate positive after-tax cash flows of $400,000 per year (all cash flows are realized at the end of the year). At the end of two years, the machine will have zero salvage value. Every two years the company can purchase a replacement machine with identical cash flows. Alternatively, Machine B requires an expenditure of $900,000 at t=0. Machine B has an expected life of three years, and will generate positive after-tax cash flows of $375,000 per year (all cash flows are realized at year end). At the end of three years, Machine B will have an after-tax salvage value of $75,000. Every three years the company can purchase a replacement machine with identical cash flows. The cost of capital is 10 percent. Which machine is the better value and why it is the better value?
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