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 firm's cost of capital is 12%.

(a) Which equipment should be chosen?

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

Answer rating: 100% (QA)

a To determine which equipment to choose we need to calculate the net present value NPV of each equipment and choose the one with the higher NPV For E... View the full answer