Barry Boswell is a financial analyst for Dossman Metal Works, Inc. and he is analyzing two alternative
Question:
Barry Boswell is a financial analyst for Dossman Metal Works, Inc. and he is analyzing two alternative configurations for the firms new plasma cutter shop. The two alternatives denoted A and B below, will perform the same task, but alternative A will cost $80,000 to purchase, while alternative B will cost only $55,000. Moreover, the two alternatives will have very different cash flows and useful lives. The after-tax costs for the two projects are as follows
Year | Alternative A | Alternative B | |||
0 | $(80,000) | $(55,000) | |||
1 | (20,000) | (6,000) | |||
2 | (20,000) | (6,000) | |||
3 | (20,000) | (6,000) | |||
4 | (20,000) | ||||
5 | (20,000) | ||||
6 | (20,000) | ||||
7 | (20,000) |
a. Calculate each project\'s EAC, given a discount rate of
10 percent.
b. Which of the alternatives do you think Barry should select? Why?
Financial Management Principles and Applications
ISBN: 978-0133423822
12th edition
Authors: Sheridan Titman, Arthur Keown, John Martin