1. Owens Mills Corp. is considering producing two mutually exclusive machine types. Machine A requires an up-front expenditure at t = 0 of $450,000, it has an expected life of 2 years, and it will generate positive after-tax cash flows of $350,000 per year (all cash flows are realized at the end of the year) for 2 years. At the end of 2 years, the machine will have $90,000 salvage value, but every two years the company can purchase a replacement machine with the same cost and identical cash inflows.
2. Alternatively, it can choose Machine B, which requires an expenditure of $1.2 million at t = 0, has an expected life of 5 years, and will generate positive after-tax cash flows of $385,000 per year (all cash flows are realized at year end). At the end of 5 years, Machine B will have an after-tax salvage value of $X. The cost of capital is 8%. What is the Salvage Value of Machine B and the end of year 5 (what is X) if both Machine A and Machine B have exactly the same Equivalent Annual Annuity (EAA for A = EAA for B)?

Answer rating: 100% (QA)

Statement showing EAA of machine A Year Cash flow PVIF 8 PV A B C A x B 1 35000000 09259 32407407 ... View the full answer