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A firm needs to perform a specific function for 12 years. Two mutually exclusive equipment...

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Finance

  1. A firm needs to perform a specific function for 12 years. Two mutually exclusive equipment are being considered. Equipment A which has a 3-year life, requires an outlay of $2,000 and expects to yield an annual net cash flow of $1,500 for each of the 3 years Equipment B, which has a 6-year life, requires an outlay of $1,000 and expects to yield an annual net cash flow of $850 for each of the 6 years. The firms cost of capital is 12%.

  1. Show which equipment should be chosen
  2. Calculate the NPV (with replacement) of equipment A over the 12 year period.

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