You are asked to evaluate whether an upgrade to your facility based on the following information would meet internal approval requirements. You are asked to calculate this quickly (as you are going into a meeting) so you are not considering depreciation, taxes, etc. - simply a quick calculation to determine which project makes more sense and whether either would be approved internally (internal hurdle/interest/discount rate is 9%). Additionally, there is a government incentive available for this type of project if the capital cost is $5 million or more.

Option 1: Capital cost of $5 million with a lifespan of 8 years

Option 2: Capital cost of $4.5 million with a lifespan of 12 years

For both options (annual): Operating costs = $100,000; Savings = $800,000