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Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap...

Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $25 million. The system will last 5 years. Do-It-Right sells a sturdier but more expensive system for $28 million; it will last for 7 years. Both systems entail $3 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 40%, and the discount rate is 16%. Either machine will be replaced at the end of its life.

a. What is the equivalent annual cost of investing in the cheap system?

b. What is the equivalent annual cost of investing in the more expensive system?

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