Question: Johnson Jets is considering two mutually exclusive machines. Machine A has an up-front cost of $100,000 (CF0 = -100,000) and produces positive after-tax cash inflows
Johnson Jets is considering two mutually exclusive machines. Machine A has an up-front cost of $100,000 (CF0 = -100,000) and produces positive after-tax cash inflows of $38,000 a year at the end of each of the next six years. Machine B has an up-front cost of $40,000(CF0 = -40,000) and produces after-tax cash inflows of $32,000 a year at the end of the next three years. After three years, Machine B can be replaced at a cost of $45,000 (paid at t = 3). The replacement machine will produce after-tax cash inflows of $34,000 a year for three years (inflows received at t = 4, 5, and 6). The companys cost of capital is 9 percent. What is the net present value (on a 6-year extended basis) of the most profitable machine?
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