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Cotner Clothes Inc. is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: (a) Machine , which has a cost of , a -year expected life, and after-tax cash flows (labor savings and depreciation) of per year; and (b) Machine , which has a cost of , a -year life, and after-tax cash flows of per year. Assume that both projects can be repeated. Knitting machine prices are not expected to rise because inflation will be offset by cheaper components (microprocessors) used in the machines. Assume that Cotner's WACC is . Using the replacement chain and EAA approaches, which model should be selected? Why?
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VerifiedIn this problem, we are asked which model should be selected to be replaced if the replacement chain and EAA approaches are used.
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