You are trying to pick the least-expensive equipment for your manufacturing operations. You have two choices: the Hi-Quality, which will cost $18,000 to purchase and which will have OCF of -$1,000 annually throughout the equipment’s expected life of 5 years; and Lo-Budget, which will cost $10,000 to purchase and which will have OCF of -$1,300 annually throughout that vehicles expected three-year life. Both pieces of equipment will be worthless at the end of their life. If you intend to replace whichever type of equipment you choose with the same thing when its life runs out, again and again out into the foreseeable future. Your business has a cost of capital of 10 percent. One iteration of each delivery equipment will consist of the following cash flows: Year0 1 2 3 4 5Hi-Quality CFs -$18,000 -$1,000 -$1,000 -$1,000 -$1,000 -$1,000Lo-Budget CFs -$10,000 -$1,300 -$1,300 -$1,300 Calculate the equivalent annuity cost for each piece of equipment. Which one should you choose?

It is the annual cost of owning and maintaining the asset which is determined by dividing the net…

Answered: You are trying to pick the…

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 5P: Hudson Corporation is considering three options for managing its data warehouse: continuing with its...

Related questions

Question

You are trying to pick the least-expensive equipment for your manufacturing operations. You have two choices: the Hi-Quality, which will cost $18,000 to purchase and which will have OCF of -$1,000 annually throughout the equipment’s expected life of 5 years; and Lo-Budget, which will cost $10,000 to purchase and which will have OCF of -$1,300 annually throughout that vehicles expected three-year life. Both pieces of equipment will be worthless at the end of their life. If you intend to replace whichever type of equipment you choose with the same thing when its life runs out, again and again out into the foreseeable future. Your business has a cost of capital of 10 percent. One iteration of each delivery equipment will consist of the following cash flows:

Calculate the equivalent annuity cost for each piece of equipment. Which one should you choose?

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 2 images