A firm is considering the purchase of one of two machines to replace an existing one.
Machine A will cost $15,000 and has a three-year life. Annual net cash flows are
expected to be $7,000, beginning one year after the machine is purchased. Machine B
will cost $35,000 and has a seven-year life. Annual net cash flows are expected to be
$8,500, beginning one year after the machine is purchased. If the firm's cost of capital
is a constant 14% forever, which machine should it buy? Assume the expected future
cash flows for each machine will remain constant forever.

Question

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The Answer of A firm is considering the purchase of one of two machines to replace an existing one.
Machine A will cost $15,000 and has a three-year life. Annual net cash flows are
expected to be $7,000, beginning one year after the machine is purchased. Machine B
will cost $35,000 and has a seven-year life. Annual net cash flows are expected to be
$8,500, beginning one year after the machine is purchased. If the firm's cost of capital
is a constant 14% forever, which machine should it buy? Assume the expected future
cash flows for each machine will remain constant forever.

A Firm Is Considering the Purchase of One of Two