Question

Longbottom Inc. needs to buy one of two possible production machines. The cost and subsequent cash...

Longbottom Inc. needs to buy one of two possible production machines. The cost and subsequent cash flows generated by each machine are given below:

A B C
1 Discount rate 11%
2
3 Year Machine A Machine B
4 0 -55,000 -70,000
5 1 20,000 30,000
6 2 25,000 25,000
7 3 30,000 20,000
8 4 15,000
9 5 10,000

The relevant discount rate is 11% for both projects.

Part 1

What is the net present value of machine A?

Part 2

What is the net present value of machine B?

Part 3

What is the equivalent annuity cash flow of machine A?

Part 4

What is the equivalent annuity cash flow of machine B?

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