Problem:

Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $220,000, a 3-year expected life, and after-tax cash flows (labor savings and depreciation) of $97,000 per year; and Machine 360-6, which has a cost of $320,000, a 6-year life, and after-tax cash flows of $93,400 per year. Knitting machine prices are not expected to rise, because inflation will be offset by cheaper components (microprocessors) used in the machines.

Requirement:

Question 1: Suppose that Filkins' cost of capital is 12%. Calculate the two projects' NPVs. Round your answers to the nearest cent.

Question 2: By how much would the value of the company increase if it accepted the better machine?

Question 3: What is the equivalent annual annuity for each machine? Please justify your answer and also describe all workings.