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You are operating an old machine that is expected to produce a net cash inflow of...

You are operating an old machine that is expected to produce a net cash inflow of $4,000 in the coming year and $4,000 next year. After that, it will die. You can replace it now with a new machine, which costs $15,000 but is much more efficient and will provide a cash inflow of $8,000 per year for 3 years (After this new machine dies, you can replace it with an identical one indefinitely). You want to know whether you should replace the old machine now or wait two years. Assume the required rate of return (discount rate) is 6%.

A.) Calculate the Effective Annual Cost (EAC) of each machine.

B.) From these EAC calculations, determine whether you should replace the old machine now or later.

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