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Davis Industries is considering two alternative machines. Machine A has an expected life of 4 years,...

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Finance

  1. Davis Industries is considering two alternative machines.Machine A has an expected life of 4 years, will cost $10 million,and will produce net cash flows of $3 million per year. Machine Bhas a life of 10 years, will cost $13 million, and will produce netcash flows of $2.5 million per year. Inflation in operation costs,machine costs is expected to be zero, and the company’s cost ofcapital is 10. Which machine should Davis Industries select?

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Evaluation of Investment proposal using Equivalent Annual Annuity EAA Rule Here the both Projects have different useful lives and therefore the decision can be made on the basis of Equivalent Annual Annuity EAA The Equivalent Annual Annuity EAA should be always preferred if the Projects has the different lives or unequal lives Since the EAA gives the exact    See Answer
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Davis Industries is considering two alternative machines.Machine A has an expected life of 4 years, will cost $10 million,and will produce net cash flows of $3 million per year. Machine Bhas a life of 10 years, will cost $13 million, and will produce netcash flows of $2.5 million per year. Inflation in operation costs,machine costs is expected to be zero, and the company’s cost ofcapital is 10. Which machine should Davis Industries select?

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