8. Sony Corporation is considering the purchase of a new phone system for a sale

Question

8. Sony Corporation is considering the purchase of a new phone system for a sales office in Boise, Idaho. The Lucent Technologies system costs $54,000, has annual operating expenses of $4,000 and an expected life of 9 years. The Toshiba system has a cost of $48,000, annual operating expenses of $4,000 and an expected life of 7 years. Ignoring depreciation and taxes and assuming a cost of capital of 9 percent for such an investment, which system should Sony purchase? You are free to use either replacement chain or EAA/EAC analysis.

Explanation / Answer

Let's calculate EAC for both options using PMT function

For Lucent, N = 9, I/Y = 9%, PMT = 4,000, FV = 0 => Compute PV = $23,981

Total PV Cost for Lucent = 23,981 + 54,000 = $77,981

Now, N = 9, I/Y = 9%, PV = 77,981, FV = 0 => Compute PMT = $13,007 is the EAC for Lucent

For Toshiba, N = 7, PMT = 4,000, I/Y = 9% FV = 0 => Compute PV = $20,132

Total PV Cost for Toshiba, PV = 20,132 + 48,000 = $68,132

N = 7, I/Y = 9%, PV = 68,132, FV = 0 => Compute PMT = $13,537 is the EAC for Toshiba

Sony should purchase Lucent system over Toshiba, as Lucent has lower EAC.

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