Marvec needs to replace an extruder and two replacements look good.Extruder A costs $102,000 and has a 10 year life.Extruder B costs only $56,000 but its expected life is 6 years.Extruder A will generate net cash flows of $17,600 per year for 10 years and B will generate net cash flows of $13,800 per year for 6 years.If Marvec's cost of capital is 11%, which extruder should be chosen and what is its NPV? Use equivalent annual annuities.
A)B, $564
B)B, $2,388
C)A, $1,646
D)A, $280

Question

Quizplus · Accepted Answer

NPVᴀ = -$102,000 + $17,600(5.889) = $1,646 NPVʙ = -$56,000 + $13,800(4.231) = $2,388
EAAA = $1,646/5.889 = $279.50 EAAB = $2,388/4.231 = $564.41 NPVᴀ = $279.50/0.11 = $2,541 NPVʙ = $564.41/0.11 = $5,131

Marvec Needs to Replace an Extruder and Two Replacements Look