Question

A pharmaceutical company is considering two alternative machines for its production line. Machine A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Machine B has a life of 10 years, will cost $132 million, and will produce net cash flows of $25 million per year. The company plans to run the production line for 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the company’s cost of capital is 11 percent. By how much would the value of the company increase if it accepted the better project (machine)?

Answer 1