Sperry Corporation can invest in one of two mutuall exclusive machines that will make a product it needs for the next 4 years. Machine A costs $9 million but realizes after- tax inflows of $6.3 million per year for 2 years, after which it must be replaced. Machine B costs $12 million and realizes after-tax inflows of $4.8 million per year for 4 years.
Based on the firm's cost of capital of 12 percent, the NPV of Machine B is $2,579,277, wuth an equivalent annual annuity (EAA) of $849,187 per year.
Calculate the EAA of Machine A. Compare your result to that of Machine B and decide which to recommend.
A. EAAa= $974,717; Purcahse Machine A
B. EAAa= $542,355; Purchase Machine B
C. EAAa= $3,336,890; Purchase MAchine A
D. EAAa= $1,084,710; Purchase Machine A
E. EAAa= $1,979,484; Purchase Machine A