Question: Blooper industries must replace its purification system. Quick & Dirty Systems sells a relatively cheap purification system for $10M that lasts 5 years. Do-It-Right sells

Blooper industries must replace its purification system. Quick & Dirty Systems sells a relatively cheap purification system for $10M that lasts 5 years. Do-It-Right sells a sturdier system for

$12M that lasts for 8 years. Both systems entail $1M in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives. The firm's tax rate is 30% and its discount rate is 12%.

a. What is the equivalent annual cost of investing in the cheap system?

b. What is the equivalent annual cost of investing in the expensive system?

c. Which system is preferred?

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3. If there are reasonable alternatives, think about your decisions based on the different reference points and see if there are any contradictions in the decisions.

4. It is only at this point that you can give the problem your full attention in relation to the various ways you have framed the problem.