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REPLACEMENT CHAIN The Fernandez Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next eight years. Machine A costs $10 million but will provide after-tax inflows of $4 million per year for 4 years. If Machine A were replaced, its cost would be $12 million due to inflation and its cash inflows would increase to $4.2 million due to production efficiencies. Machine B costs $15 million and will provide after-tax inflows of $3.5 million per year for 8 years. If the WACC is 10%, which machine should be acquired? Explain.

BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Chapter
Section
Chapter 12, Problem 16P
Textbook Problem

REPLACEMENT CHAIN The Fernandez Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next eight years. Machine A costs $10 million but will provide after-tax inflows of $4 million per year for 4 years. If Machine A were replaced, its cost would be $12 million due to inflation and its cash inflows would increase to $4.2 million due to production efficiencies. Machine B costs $15 million and will provide after-tax inflows of $3.5 million per year for 8 years. If the WACC is 10%, which machine should be acquired? Explain.

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