Sperry Corporation can invest in one of two mutually exclusi…
Sperry Corporation can invest in one of two mutually exclusive machines that will make a product it needs for the next 4 years. Machine A costs $9 million but realizes after-tax inflows of $6.3 million per year for 2 years, after which it must be replaced. Machine B costs $12 million and realizes after-tax inflows of $4.8 million per year for 4 years. Based on the firm’s cost of capital of 12 percent, the NPV of Machine B is $2,579,277, with an equivalent annual annuity (EAA) of $849,187 per year. Calculate the EAA of Machine A. Compare your result to that of Machine B and decide which to recommend.