Question

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 $75,000to? purchase, while alternative B will cost only $ 50,000.

?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   $(75,000)   $(50,000)
1   $(17,000)   $(8,000)
2   $(17,000)   $(8,000)
3   $(17,000)   $(8,000)
4   $(17,000)  
5   $(17,000)  
6   $(17,000)  
7   $(17,000)   

a. Calculate each? project's EAC, given a discount rate of 11%.

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

Answer 1