Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification systemfor $10 million. The system will last 5 years. Do-It-Right sells a sturdier but more expensive system for $12 million; it will last for 8 years.Both systems entail $1 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives;neither will have any salvage value at the end of its life. The firm's tax rate is 30%, and the discount rate is 14%.a. What is the equivalent annual cost of investing in the cheap system?Note: Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions roundedto 2 decimal places.b. What is the equivalent annual cost of investing in the more expensive system?Note: Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions roundedto 2 decimal places.c. Which system should Blooper install?Answer is complete but not entirely correct.$6.85millions7.48millionsa. Equivalent annual costb. Equivalent annual costc. Which system should Blooper install?$Do-It-Right

Equivalent annual savings is the cost of operating and maintaining an asset annually. It is also…

Answered: Blooper Industries must replace its…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 10P

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Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $16 million. The system will last 4 years. Do-It-Right sells a sturdier but more expensive system for $18 million; it will last for 5 years. Both systems entail $3 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The firm’s tax rate is 30%, and the discount rate is 12%. Either machine will be replaced at the end of its life. a. What is the equivalent annual cost of investing in the cheap system? (Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded to 2 decimal places.) b. What is the equivalent annual cost of investing in the more expensive system? (Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in…
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