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(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 Business Analytics (MindTap Course List)
Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Chapter15: Decision Analysis
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Module 5 Question 1 Part A 

(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:(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.)
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)
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)
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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 Question
Which of the alternatives do you think Barry should​ select? Why?  ​(Select the best choice​ below.)
 
 
A. Alternative B should be selected because it has the highest NPV.
 
B. This cannot be determined from the information provided.
 
C. Alternative B should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative A.
 
D.
Alternative A should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative B.
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Follow-up Question
b. Which of the alternatives do you think Barry should​ select? Why?
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