(Related to Checkpoint 11.2) (Calculating EAC) 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, denoted A and B below, will perform the same task, but alternative A will cost $80,000 to purchase, while alternative B will cost only $55,000. Moreover, the two alternatives will have very different cash flows and useful lives. The after-tax costs for the two projects are as follows: a. Calculate each project's EAC, given a discount rate of 10 percent.
(Related to Checkpoint 11.2) (Calculating EAC) 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, denoted A and B below, will perform the same task, but alternative A will cost $80,000 to purchase, while alternative B will cost only $55,000. Moreover, the two alternatives will have very different cash flows and useful lives. The after-tax costs for the two projects are as follows: a. Calculate each project's EAC, given a discount rate of 10 percent.
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
Related questions
Question
Module 5 Question 1 Part A
Transcribed Image Text:(Related to Checkpoint 11.2) (Calculating EAC) 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, denoted A and B below, will perform the same task, but
alternative A will cost $80,000 to purchase, while alternative B will cost only $55,000. Moreover, the two alternatives will have very different cash
flows and useful lives. The after-tax costs for the two projects are as follows:
a. Calculate each project's EAC, given a discount rate of 10 percent.
a. Alternative A's EA) at a discount rate of 10% is $
(Round to the nearest cent.)
Transcribed Image Text:Year
0
1
2
3
4
5
6
7
(Click on the icon
Alternative A
$(80,000)
(20,000)
(20,000)
(20,000)
(20,000)
(20,000)
(20,000)
(20,000)
in order to copy its contents into a spreadsheet.)
Alternative B
$(55,000)
(6,000)
(6,000)
(6,000)
Expert Solution
Step 1
EAC is the equivalent annual cost.
EAC is used in capital budgeting to compare projects with unequal lives.
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Follow-up Questions
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Follow-up Question
Which of the alternatives do you think Barry should select? Why? (Select the best choice below.)
Alternative A should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative B.
Solution
by Bartleby ExpertFollow-up Question
b. Which of the alternatives do you think Barry should select? Why?
Solution
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