Danford Enterprises can invest in one of two mutually exclus…
Danford Enterprises can invest in one of two mutually exclusive machines that will make a product it needs for the next 6 years. Machine X costs $10 million but realizes after-tax inflows of $4.3 million per year for 3 years, after which it must be replaced. Machine Y costs $16 million and realizes after-tax inflows of $4.6 million per year for 6 years. Based on the firm’s cost of capital of 8 percent, the NPV of Machine Y is $5,265,246, with an equivalent annual annuity (EAA) of $1,138,954 per year. Calculate the EAA of Machine X. Compare your result to that of Machine Y and decide which to recommend.