A firm needs to perform a specific function or 12 years. Two mutually exclusive equipments' are being considered. Equipment A which has a 3-year life, requires an outlay of $2,000 and expects to yield an annual net cash flow of $1,500 for each of the 3 years. Equipment B, which has a 6-year life, requires an outlay of $1,000 and expects to yield an annual net cash flow of $850 for each of the 6 years. The firms cost of capital is 12%.

(a) Show which equipment should be chosen

(b) Calculate the NPV (with replacement) of equipment A over the 12 year period.