Adequate information: Costs of System A = $265,000 Useful life of System A = 4 years Pretax annual operating costs of System A (PAOC A ) = $73,000 Costs of System B = $380,000 Useful life of System B = 6 years Pretax annual operating costs of System B (PAOC B ) = $64,000 Tax rate = 23% or 0.23 Discount rate = 7.5% or 0.075 To compute: Which system should the company choose if the projects will be replaced when they wear out? Introduction: Equivalent annual cost refers to the annual cost of operating and maintaining an asset.

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Chapter 6, Problem 16QAP

Summary Introduction

Adequate information:

Costs of System A = $265,000

Useful life of System A = 4 years

Pretax annual operating costs of System A (PAOC_A) = $73,000

Costs of System B = $380,000

Useful life of System B = 6 years

Pretax annual operating costs of System B (PAOC_B) = $64,000

Tax rate = 23% or 0.23

Discount rate = 7.5% or 0.075

To compute: Which system should the company choose if the projects will be replaced when they wear out?

Introduction: Equivalent annual cost refers to the annual cost of operating and maintaining an asset.

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