Question: 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,

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?

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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 full answer

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