Fairpeter Manufacturing, a maker of twisted manila rope, is considering the replacement of its old fully depreciated twisting machine. Machine X cost $190,000 with a 3 year life and after tax cash flows of $87,000 per year. Machine Y costs $360,000 has a 6 year life and after tax cash flows of $98,300 per year. However, it requires a major overhaul costing $50,000 in year 3. The machines are mature technology and may be expected to be replaced in kind. Fairpeter's cost of capital is 14% a) Should the old machine be replaced? Reason? (no calculations needed) b) Calculate the EAA of machines X and Y and recommend the preferred machine if replacing.  

Answer rating: 100% (QA)

Equivalent Annual Annuity EAA can be computed by using the formulaNPV r 1 1 rn W... View the full answer