Question

Managers at Acme Doohickey Co. are considering two projects.

• Project A: purchase and operation of a new machine, called the Starpunch, for manufacturing Acme doohickeys. The life of this project is three years.
• Project B: purchase and operation of a new machine, called the Sunspot, for manufacturing Acme doohickeys. The life of this project is two years.

The machines have identical capacity and produce the same doohickey. The company only has floor space in its machinists’ shop for one machine.

Assume that the appropriate discount rate in 8.6%, compounded annually. Calculate the Equivalent Annual Cash Flow (EACF) for Project A. Round to the dollar. Do not type the $ symbol. Also, if the EACF is negative, then include a minus sign in your answer.

Table: Expected Cash Flows for Projects A and B

Year	A revenue	A costs	A NCF	B revenue	B costs	B NCF
0		($29,000)			($23,000)
1	$20,000	($9,000)		$20,000	($7,000)
2	$20,000	($8,000)		$20,000	($6,000)
3	$20,000	($8,000)

Note: the table lists net revenue and net cost for each project and each year. But the table is incomplete; you will need to calculate the Net Cash Flows.

Answer 1

	Project A	Project B
EACF	$263.81	$475.50

Project B is more profitable

WORKINGS:

NCF is as below:

Year	A revenue	A costs	A NCF	B revenue	B costs	B NCF
0		($29,000)	($29,000)		($23,000)	($23,000)
1	$20,000	($9,000)	$11,000	$20,000	($7,000)	$13,000
2	$20,000	($8,000)	$12,000	$20,000	($6,000)	$14,000
3	$20,000	($8,000)	$12,000			$0

We compute NPV and then EACF

	Project A	Project B
NPV	$672.58	$841.02
EACF	$263.81	$475.50