Question: Machines A and B are mutually exclusive and are expected to produce the following real cash flows: Cash Flows ($ thousands) Machine C 0 C

Machines A and B are mutually exclusive and are expected to produce the following real cash flows:

Cash Flows ($ thousands)

Machine

C0

C1

C2

C3

C4

A

-117

115

135

150

B

-125

110

150

-50

200

The real opportunity cost of capital is 10%.

  1. Calculate the NPV of each machine. (5 marks)
  2. Calculate the equivalent annual cash flow from each machine. (5 marks)
  3. Which machine should you buy? Justify your answer. (5 marks)
  4. When appraising mutually exclusive investments in plant and equipment, financial managers calculate the investments' equivalent annual costs and rank the investments on this basis. Critically discuss why this is necessary and why not just compare the investments' NPVs? (5 marks)

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