Question

Rollon Inc. is comparing the operating costs of two types of equipment. The standard model costs $50,000 and will have a useful life of four years. Operating costs are expected to be $4,000 per year. The superior model costs $90,000 and will have a useful life of six years. Its operating costs are expected to be $2,500 per year. Both models will be able to operate at the same level of output and quality and generate the same cash earnings. Rollon's cost of capital is 8 percent.
a. Compute the present values of the cash costs over the useful life of each model.
b. Can the two present values be compared? If not, why not?
c. What is the annuity-equivalent cost of each model?
d. Which model should the company purchase? Explain.


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  • CreatedMarch 27, 2015
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