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In: Finance

Managers of Coronado Embroidery have decided to purchase a new monogram machine and are considering two...

Managers of Coronado Embroidery have decided to purchase a new monogram machine and are considering two alternative machines. The first machine costs $114,000 and is expected to last five years. The second machine costs $182,000 and is expected to last eight years. Assume that the opportunity cost of capital is 8 percent. What is the equivalent annual cost for each system? (Do not round intermediate calculations. Round final answers to 2 decimal places, e.g. 2.75.) Equivalent Annual Cost First machine $ Second machine $ Which machine should Coronado Embroidery purchase? Coronado Embroidery should purchase the machine.

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Expert Solution

Machine 1
Discount rate 8.000%
Year 0 1 2 3 4 5
Cash flow stream -114000.000 0.000 0.000 0.000 0.000 0.000
Discounting factor 1.000 1.080 1.166 1.260 1.360 1.469
Discounted cash flows project -114000.000 0.000 0.000 0.000 0.000 0.000
NPV = Sum of discounted cash flows
NPV Machine 1 = -114000.00
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Equvalent annuity(EAA)= -28552.04
Required rate =   8.000%
Year 0 1 2 3 4 5
Cash flow stream 0.00 -28552.04 -28552.04 -28552.04 -28552.04 -28552.04
Discounting factor 1.000 1.080 1.166 1.260 1.360 1.469
Discounted cash flows project 0.000 -26437.070 -24478.769 -22665.527 -20986.599 -19432.036
Sum of discounted future cashflows = -114000.00
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Machine 2
Discount rate 8.000%
Year 0 1 2 3 4 5 6 7 8
Cash flow stream -182000.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Discounting factor 1.000 1.080 1.166 1.260 1.360 1.469 1.587 1.714 1.851
Discounted cash flows project -182000.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
NPV = Sum of discounted cash flows
NPV Machine 2 = -182000.00
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Equvalent annuity(EAA)= -31670.69
Required rate =   8.000%
Year 0 1 2 3 4 5 6 7 8
Cash flow stream 0.00 -31670.69 -31670.69 -31670.69 -31670.69 -31670.69 -31670.69 -31670.69 -31670.69
Discounting factor 1.000 1.080 1.166 1.260 1.360 1.469 1.587 1.714 1.851
Discounted cash flows project 0.000 -29324.710 -27152.509 -25141.212 -23278.900 -21554.537 -19957.905 -18479.541 -17110.686
Sum of discounted future cashflows = -182000.00
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor

Choose Machine 1 as it has lower EAC


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