Thompson Manufacturing must choose between two types of furnaces to install.Model A has a 6-year life,and an NPV of $5,000.Model B has a 5-year life,and an NPV of $4,200.The relevant discount rate is 12%.Which model should be chosen? What's the annual cash flow from that model?

Question

Quizplus · Accepted Answer

Suppose the annual annuity of model A is x,and that of model B is y. x/1.12 + x/1.12² + x/1.12³+ x/1.12⁴ + x/1.12⁵+ x/1.12⁶ = 5000 x = $1216 y/1.12 + y/1.12² + y/1.12³+ y/1.12⁴ + y/1.12⁵= 4200 y = $1165

Thompson Manufacturing Must Choose Between Two Types of Furnaces to Install.Model