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Equivalent Annual Cost for the Blooper Industry

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's tax rate is 35%, and the discount rate is 15%.

a. Calculate the equivalent annual cost of each alternative: (Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.)

Equivalent Annual Cost
Quick & Dirty $____________ million
Do-It-Right $___________ million


b. Which system should Blooper install?

Quick & Dirty

Solution Summary

The equivalent annual cost for the blooper industry is determined.