Tulsa Company is considering investing in new bottling equipment and has two options:

Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa’s cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa’s controller:

Required:
Using the NPV method, determine which option Tulsa shouldselect.

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Option A Option B Initial investment Annual cash inflows Annual cash outflows Costs to rebuild Salvage value Estimated useful life $320,000 150,000 70,000 120,000 $454,000 160,000 75,000 0 24,000 8 years 8 years