Annual Equivalent Cash Flows
3. A firm needs to decide which machine to purchase. Factory 1 costs $3,000, has a useful life of three years, and has annual maintenance costs of $800. Factory 2 costs $12,000 and has a useful life of four years, and has annual maintenance costs of $1,000. Both are worthless after their useful lives of operation. They are expected to generate the same annual cash flows. The discount rate is 10% for both factories. Based on annual equivalent cash flows, which factory should the company select?