A company is considering replacing an old piece of equipment that is completely depreciated. One possible replacement (machine 1) has a cost of $190,000, an expected 3-year life, and positive after-tax cash flows of $87,000 per year. The other replacement (machine 2) being considered has a cost of $360,000, an expected 6-year life and positive after-tax cash flows of $98,300 per year. Assume that the company's WACC is 14%.

Using the replacement chain approach, find the extended NPV of machine 1. Round to the nearest dollar.

Using the equivalent annual annuity (EAA) approach, find the EAA of machine 1.

Using the equivalent annual annuity (EAA) approach, find the EAA of machine 2.

Assuming that both projects can be repeated, which machine should be selected to replace the old equipment? Machine 1 or Machine 2?

Answer rating: 100% (QA)

Replacement Chain Approach The replacement chain approach involves calculating the NPV of each machines renewal cycle This is done by calculating the ... View the full answer