(Suggested time:25 minutes; Difficulty level: Easy) (18 marks) GIB Industries needs electronic equipment. Management has narrowed the choices to the LAS and the TED. It would need 16 LASs. Each LAS costs $14,900 and requires $1,650 of maintenance each year. At the end of the computers five-year life, GIB expects to be able to sell each one for $1,300. An initial net working capital of $120,000 is required to set up all LAS units.

On the other hand, GIB could buy 13 TEDs. TEDs cost $18,000 each and each machine requires $1,600 maintenance every year. They last for three years and have no resale value. TEDs require an initial net working capital of $60,000 and an $80,000 addition to NWC in the first year.

Whichever model GIB chooses, it will buy that model forever. Both LAS and TED equipment belong to Class 9 (25%), and all classes of assets continue to exist at the end of the project. Assume that maintenance costs occur at year-end.

Required:

Which model should GIB buy if the cost of capital is 14% and the tax rate is 40%? Show your calculation!

Hint: Dont forget to consider taxes on cash flows.