Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $10 million. The system will last 5 years. Do It - Right sells a sturdier but more expensive system for $12 million; it will last for 8 years. Both systems entail $1 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The firm's tax rate is 30%, and the discount rate is 14%. What is the equivalent annual cost of investing in the cheap system?
Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $10 million. The system will last 5 years. Do It - Right sells a sturdier but more expensive system for $12 million; it will last for 8 years. Both systems entail $1 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The firm's tax rate is 30%, and the discount rate is 14%. What is the equivalent annual cost of investing in the cheap system?
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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Am. 113.
Transcribed Image Text:Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system
for $10 million. The system will last 5 years. Do - It - Right sells a sturdier but more expensive system for $12 million; it will last for 8
years. Both systems entail $1 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful
lives; neither will have any salvage value at the end of its life. The firm's tax rate is 30%, and the discount rate is 14%. What is the
equivalent annual cost of investing in the cheap system?
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