Consider the two mutually exclusive machines given in Table PI5.13.
The initial investment will be financed with 70% equity and 30% debt. The before-tax debt interest rate, which combines both short-term and long-term financing, is 10% with the loan to be repaid in equal annual installments over the project life. The equity interest rate (ie), which combines the two sources of common and preferred stock, is 15%. The firm"s marginal income tax rate is 35%.
TABLE P15.I3

(a) Compare the alternatives using ie = 15%. Which alternative should be selected?
(b) Compare the alternatives using k. Which alternative should be selected?
(c) Compare the results obtained in parts (a) and (b).

Machine A $40,000 6 years S 4,000 $ 8,000 $20,000 5 year Machine B $60,000 6 years $ 8,000 $10,000 $28,000 5 year Initial investment Service life Salvage value Annual O&M Annual revenues MACRS property cost