A financial analyst can use the equivalent annual cash-flow approach to determine the year in which an existing machine can be profitably replaced with a new machine.

Question

Quizplus · Accepted Answer

The equivalent annual cash-flow approach takes into account the present value of all cash flows over the life of both machines and calculates an equivalent annual cash flow for each. By comparing these equivalent annual cash flows, the analyst can determine the year in which the new machine will become more profitable and should be purchased.

A Financial Analyst Can Use the Equivalent Annual Cash-Flow Approach