Equivalent annual cost calculation Dossman Metal Works, Inc

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(Equivalent annual cost calculation) Barry Boswell is a financial analyst for Dossman Metal Works, Inc. and he is analyzing two alternative configurations for the firm's new plasma cutter shop. The two alternatives that are denoted A and B below perform the same task and although they each cost to purchase and install they offer very different cash flows. Alternative A has a useful life of 7 years whereas Alternative B will only last for 3 years. The after-tax cash flows from the two projects are as follows:

 

 

 

a. Calculate each project's equivalent annual cost (EAC) given a discount rate of 10 percent. (Round to the nearest cent.)

 

a. Alternative A's equivalent annual cost (EAC) at a discount rate of 10% is:

$

b. Alternative B's equivalent annual cost (EAC) at a discount rate of 10% is

$

 

b. Which of the alternatives do you think Barry should select? Why? (Select the best choice below.) 

 

a.  This cannot be determined from the information provided. 

b.  Alternative B should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative A. 

c.   Alternative A should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative B. 

d.  Alternative A should be selected because it has the highest NPV.