Question

g Projects with different lives: Your firm is deciding whether to purchase a high-quality printer for your office or one of lesser quality. The high-quality printer costs $45,000 and should last four years. The lesser quality printer costs $35,000 and should last three years. If the cost of capital for the firm is 14 percent, then what is the equivalent annual cost for the best choice for the firm

Answer 1

Answer:

The lesser quality machine should be purchased because it has a lower equivalent annual cost of $15,075.60

Explanation:

The equivalent annual cost is the present value of the printer machine divided by the present value  annuity factor.

Annuity factor for n years = 1- (1+r)^(-n)/r

Annuity factor for four years = (1- 1.14^-4)/0.14 =2.9137

Annuity factor for three years =(1- 1.14^-3)/0.14= 2.3216

Printer                                                        Equivalent annual cost of printer

High quality        45,000/2.9137                  15,444.22

Lesser quality    35,000/2.3216                   15,075.60

The lesser quality machine should be purchased because it has a lower equivalent annual cost of $15,075.60