Ruff Motors needs to select an assembly line for producing their new SUV. They have two options: • Option A is a highly automated assembly line that has a large up-front cost but low maintenance cost over the years. This option will cost $8 million today with a yearly operating cost of $2 million. The assembly line will last for 5 years and be sold for $5 million in 5 years. • Option B is a cheaper alternative with less technology, a longer life, but higher operating costs. This option will cost $7 million today with an annual operating cost of $2.5 million. This assembly line will last for 8 years and be sold for $1 million in 8 years. The firm’s cost of capital is 12%. Assume a tax rate of zero percent. The equivalent annual cost (EAC) for Option A is $_______ million. The equivalent annual cost (EAC) for Option B is $_______ million.
Ruff Motors needs to select an assembly line for producing their new SUV. They have two options:
• Option A is a highly automated assembly line that has a large up-front cost but low maintenance
cost over the years. This option will cost $8 million today with a yearly operating cost of $2 million.
The assembly line will last for 5 years and be sold for $5 million in 5 years.
• Option B is a cheaper alternative with less technology, a longer life, but higher operating costs.
This option will cost $7 million today with an annual operating cost of $2.5 million. This assembly
line will last for 8 years and be sold for $1 million in 8 years.
The firm’s cost of capital is 12%. Assume a tax rate of zero percent.
The equivalent annual cost (EAC) for Option A is $_______ million.
The equivalent annual cost (EAC) for Option B is $_______ million.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
