bloopers Industries must replace the magnoslum purifcation system. Quick & Dirty
ID: 2699544 • Letter: B
Question
bloopers Industries must replace the magnoslum purifcation system. Quick & Dirty Systems sells a reatively chepa purification system for 12 million. The system will last 4 years. Do it Right sells a strudier 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 strightline to a final value of zero over their useful lives neighter will have any salvage value at the end of its life. The firm a tax rate is 35% and the discount rate is 15%
Calcualte the equivalent annual cost of each alternative
Quck and Dirty
do it right
Which system should Blooper install
Explanation / Answer
Present value of each alternative
Quick and Dirty = 12 million + (2- (2+12/4)*0.35 ) PVIFA(15%,4) = 12 + 0.7137 = $12.7317 million
do it right = 13 million + (2-(2+13/5)*0.35)PVIFA(15%,5) = 13 + 1.3073 = $14.3073 million
the equivalent annual cost of each alternative
Quck and Dirty = 12.7317/PVIFA(15%,4) = $4.4595 Million
do it right = 14.3073/PVIFA(15%,5) = $4.2681 Million
Which system should Blooper install
Do it right system should be installed
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