Blooper Industries must replace its magnoosium purification system. Quick & Dirt
ID: 2629409 • Letter: B
Question
Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $12 million. The system will last 4 years. Do-It-Right sells a sturdier but more expensive system for $13 million; it will last for 5 years. Both systems entail $2 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
Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $12 million. The system will last 4 years. Do-It-Right sells a sturdier but more expensive system for $13 million; it will last for 5 years. Both systems entail $2 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
Explanation / Answer
Quick and dirty system
Equivalent Annual Cost = 12000,000[15%*(1+15%)^4]/((1+15%)^4 - 1)+ 950000= 4203184.219+ 250000=5.153 million
Do it right
Equivalent Annual Cost = 13000,000[15%*(1+15%)^5]/((1+15%)^5 - 1)+ 1090000= 4.968 million
Equivalent Annual Cost
Quick & Dirty $5.153 million
Do-It-Right $4.968 million
0 1 2 3 4 Operating cost -12000000 -2000000 -2000000 -2000000 -2000000 Depreciation -3000000 -3000000 -3000000 -3000000 Net cash flow -950000 -950000 -950000 -950000