PART 2. USING EQUIVALENT ANNUAL COST/PAYMENT (15 points)

Below you are given two machines that if adopted would lower your annual production cost. Your "required rate of return (discount rate)" is 11.5%.

Machine A

After-Tax Initial Cost = $3200

3-year Life

Annual after-tax savings = $1500

Expected Salvage Value = $0

Straight-line Depreciation

Machine B

After-Tax Initial Cost = $2000

2-year Life

Annual after-tax savings = $1400

Expected Salvage Value = $0

Straight-line Depreciation

(a)Calculate the NPV for each machine. Show your work.

NPVA = _________________________________

NPVB = _________________________________

(b) Whichever machine you adopt will be used forever (you will purchase and use it over and over again). Which machine would you recommend and why? (hint: look at the title of this question). Show your work