Corbett Industries can invest in one of two mutually exclusi…
Corbett Industries can invest in one of two mutually exclusive machines that will make a product it needs for the next 8 years. Machine G costs $10 million but realizes after-tax inflows of $3.1 million per year for 4 years, after which it must be replaced. Machine H costs $13 million and realizes after-tax inflows of $2.8 million per year for 8 years. Based on the firm’s cost of capital of 8 percent, the NPV of Machine H is $3,090,589, with an equivalent annual annuity (EAA) of $537,808 per year. Calculate the EAA of Machine G. Compare your result to that of Machine H and decide which to recommend.