JBM Associates has additional cash available for investment. One of the production machines needs to be replaced, and management is considering two options. Both options require a similar initial outlay and have a useful life of 8 years. However, one of the machines will generate $20,000 annually in positive after-tax cash flows and would have an after-tax residual value of $20,000. The other option will generate $15,000 annually in positive after-tax cash flows and would have an after-tax residual value of $11,000.
Using a discount rate of 9%, which option is the most attractive?

Question

JBM Associates has additional cash available for investment. One of the production machines needs to be replaced, and management is considering two options. Both options require a similar initial outlay and have a useful life of 8 years. However, one of the machines will generate $20,000 annually in positive after-tax cash flows and would have an after-tax residual value of $20,000. The other option will generate $15,000 annually in positive after-tax cash flows and would have an after-tax residual value of $11,000. 
Using a discount rate of 9%, which option is the most attractive?

Quizplus · Accepted Answer

The Answer of JBM Associates has additional cash available for investment. One of the production machines needs to be replaced, and management is considering two options. Both options require a similar initial outlay and have a useful life of 8 years. However, one of the machines will generate $20,000 annually in positive after-tax cash flows and would have an after-tax residual value of $20,000. The other option will generate $15,000 annually in positive after-tax cash flows and would have an after-tax residual value of $11,000. 
Using a discount rate of 9%, which option is the most attractive?

JBM Associates Has Additional Cash Available for Investment