You have been asked to evaluate 2 pollution control devices. The wet scrub costs $100 to set up and $50 per year to operate. It must be completely replaced every 3 years, and it has no salvage value. The dry scrub device costs $200 to set up and $30 per year to operate. It lasts for 5 years and has no salvage value. Assuming that pollution control equipment is replaced as it wears out, which device do you recommend if the cost of capital is 10%?
A) Dry scrub, the EAC is $11.00.
B) Wet scrub, the EAC is $90.21.
C) Dry scrub, the EAC is $82.76.
D) Wet scrub, the EAC is $9.79.
E) Dry scrub, the EAC is $124.34.

Question

Quizplus · Accepted Answer

The correct choice is based on calculating the Equivalent Annual Cost (EAC) for both devices. The EAC takes into account the initial cost, annual operating costs, replacement costs, and the cost of capital (discount rate). The dry scrub has a lower EAC, making it the more cost-effective option over its lifespan when considering the given parameters.

You Have Been Asked to Evaluate 2 Pollution Control Devices