Your are the CFO of a firm. You have to determine which machine you want to use for your upcoming expansion of your operations. Your company was awarded a grant that requires you to make 500,000 products. Each product sells for 18$, so you will make a gross total of 9$ million.
Style A is a high tech machine that has the capacity to complete needed products in 5 years. During 5 years, machine can generate 450,000$ CF each quarter. In addition, when 5 years are up, you can sell machine and software for 120,000$.
Style B require 10 years to make necessary products. During first 5 years, you can generate 280,000$ per quarter. However, machine will slowly break down over the last five year and will only generate 170,000$ each quarter. At the end of ten years, the machine wil be all used up and cannot be sold.
1. Which machine is worth more today? The interest rate is 6% compounded quarterly.
2. Suppose the firm can invest exactly half of each CF during each time period at a rate of 6% compounded quarterly, which one would generate the most money by time 20?
Show your work.