Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the
Question:
Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the SAL 5000 and the HAL 1000. The company would need nine SALs, and each SAL costs $3,600 and requires $390 of maintenance each year. At the end of the computer’s eight-year life, each one could be sold for $200. Alternatively, the company could buy seven HALs. Each HAL costs $4,300 and requires $355 of maintenance every year. Each HAL lasts for six years and has a resale value of $220 at the end of its economic life. The company will continue to purchase the model that it chooses today into perpetuity, and the tax rate is 23 percent. Assume that the maintenance costs occur at year-end. Depreciation is straight-line to zero. Which model should the company buy if the appropriate discount rate is 11 percent?
Step by Step Answer:
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan