Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the SAL 5000 and the HAL 1000. Gold Star would need 9 SALs, and each SAL costs $3,700 and requires $500 of maintenance each year. At the end of the computer's eight-year life, Gold Star expects to sell each one for $200. Alternatively, Gold Star could buy seven HALs. Each HAL costs $4,400 and requires $550 of maintenance every year. Each HAL lasts for six years and has a resale value of $220 at the end of its economic life. Gold Star will continue to purchase the model that it chooses today into perpetuity. Gold Star has a 34 percent tax rate. Assume that the maintenance costs occur at year-end. Depreciation is straight-line to zero. Which model should Gold Star buy if the appropriate discount rate is 11 percent?
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