Mountain Fresh Water Company is considering two mutually exclusive machines. Machine A has an up-front cost of $100,000 (CF0 = -100,000), and it produces positive after-tax cash inflows of $40,000 a year at the end of each of the next six years. Machine B has an up-front cost of $50,000(CF0 = - 50,000), and it produces after-tax cash inflows of $30,000 a year at the end of the next three years. The
Company's cost of capital is 10.5%. Based on the equivalent annual annuity, which machine will be chosen?
A) A,$71,687
B) A,$16,702
C) B,$23,954
D) B,$9,718

Question

Quizplus · Accepted Answer

Machine A's equivalent annual annuity (EAA) is $16,702, which is higher than Machine B's EAA of $9,718. Therefore, Machine A is the better choice based on the EAA method.

Mountain Fresh Water Company Is Considering Two Mutually Exclusive Machines