Assume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product. It will require the company to buy a new equipment that will generate the same revenue for the company each year. The table below shows the initial and annual costs for each option. Cost Option A Option B Initial Investment 1,400,000 1,500,000 Year 1 35000 25000 Year 2 35000 25000 Year 3 35000 25000 Year 4 35000 25000 Year 5 25000 Required: Perform capital budgeting technique based on Equivalent Annual Cost (EAC) to advise the Company Management which option should be chosen if the relevant discount rate is 9%?
Assume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product. It will require the company to buy a new equipment that will generate the same revenue for the company each year. The table below shows the initial and annual costs for each option. Cost Option A Option B Initial Investment 1,400,000 1,500,000 Year 1 35000 25000 Year 2 35000 25000 Year 3 35000 25000 Year 4 35000 25000 Year 5 25000 Required: Perform capital budgeting technique based on Equivalent Annual Cost (EAC) to advise the Company Management which option should be chosen if the relevant discount rate is 9%?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Assume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product. It will require the company to buy a new equipment that will generate the same revenue for the company each year. The table below shows the initial and annual costs for each option.
| Cost | Option A | Option B |
| Initial Investment | 1,400,000 | 1,500,000 |
| Year 1 | 35000 | 25000 |
| Year 2 | 35000 | 25000 |
| Year 3 | 35000 | 25000 |
| Year 4 | 35000 | 25000 |
| Year 5 | 25000 | |
Required:
Perform capital budgeting technique based on Equivalent
Annual Cost (EAC) to advise the Company Management which option should be chosen if the
relevant discount rate is 9%?
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