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# Question #1: Your company is considering the purchase of either machine A or machine B as…

Question #1: Your company is considering the purchase of either machine A or machine B as shown in the following table: Initial cost Estimated life Salvage value Other costs Machine A $80,000 20 years $20,000 $18,000 per year Machine B $100,000 25 years $25,000 $15,000 per year for the first 15 years $20,000 per year for the next 10 years 1. If the interest rate is 10%, and all cash flows may be treated as end-of-year cash flows. Assume that equivalent annual cost is the value of the constant annuity equal to the total cost of a project. Calculate the equivalent annual cost of machine B. 2. If funds equal to the present worth of the cost of purchasing and using machine A over 20 years were invested at 10% per annum. Calculate the value of the investment at the end of 20 years. 3. How much money would have to be placed in a sinking fund each year to replace machine B at the end of 25 years if the fund yields 10% annual compound interest and if the first cost of the machine is assumed to increase at a 6% annual compound rate? (Assume the salvage value does not change.)

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