Projects with different lives: Your company is deciding whether to purchase a high-quality printer for your office or one of lesser quality. The high-quality printer costs $40,000 and should last four years. The lesser quality printer costs $30,000 and should last three years. If the cost of capital for the company is 13 percent, then what is the equivalent annual cost for the best choice for the company? Round to the nearest dollar.

Question

Quizplus · Accepted Answer

To find the equivalent annual cost for each option, we need to calculate the present value of each option and then divide by the annuity factor. For the high-quality printer, the present value is $40,000, and for the lesser quality printer, the present value is $30,000.

For the high-quality printer, we need to find the annuity factor for four years at 13 percent. Using a financial calculator, we get an annuity factor of 2.92. Dividing the present value by the annuity factor, we get an equivalent annual cost of $13,699.

For the lesser quality printer, we need to find the annuity factor for three years at 13 percent. Using a financial calculator, we get an annuity factor of 2.62. Dividing the present value by the annuity factor, we get an equivalent annual cost of $11,450.

Therefore, the best choice for the company is the lesser quality printer with an equivalent annual cost of $11,450.

Projects with Different Lives: Your Company Is Deciding Whether to Purchase