Which machine should company use if cost of capital is given


The Perez Company has the opportunity to invest in one of two mutually exclusive machines which will produce a product it will need for the foreseeable future. Machine A costs $10 million but realizes after-tax inflows of $4 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $15 million and realizes after-tax inflows of $3.5 million per year for 8 years, after which it must be replaced. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. If the cost of capital is 10 percent, which machine should the company use?

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Finance Basics: Which machine should company use if cost of capital is given
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