None A $70,000 machine with a 9-year class life was purchased 2 years ago. The machinewill now be sold for $50,000 and replaced with a new machine costing $83,000, witha 10-year class life. The new machine will not increase sales, but will decreaseoperating costs by $5,000 per year. Simplified straight line depreciation is employedfor both machines, and the marginal corporate tax rate is 34 percent. What is theincremental annual cash flow associated with the project?

The incremental annual cash flow in this problem is the after tax savings from the decrease in…

Answered: A $70,000 machine with a 9-year class…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 3P

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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 $10 million but realizes after-tax inflows of $4 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $15 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 10%. 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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