Question

​(Related to Checkpoint​ 11.2) ​(Calculating EAC) Barry Boswell is a financial analyst for Dossman Metal​ Works, Inc. and he is analyzing two alternative configurations for the​ firm's new plasma cutter shop. The two​ alternatives, denoted A and B​ below, will perform the same​ task, but alternative A will cost

​$85 comma 00085,000

to​ purchase, while alternative B will cost only

$ 55 comma 000$55,000.

​Moreover, the two alternatives will have very different cash flows and useful lives. The​after-tax costs for the two projects are as​ follows:

Year	Alternative A		Alternative B
0	​$(85,000​)		​$(55,000​)
1	​(21,000​)		​(5,000​)
2	​(21,000​)		​(5,000​)
3	​(21,000​)		​(5,000​)
4	​(21,000​)
5	​(21,000​)
6	​(21,000​)
7	​(21,000​)

a. Calculate each​ project's EAC, given a discount rate of

88

percent.

b. Which of the alternatives do you think Barry should​ select? Why?

Answer 1