Question

1a.) A firm is considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,450.00 to install, $5,057.00 to operate per year for 7 years at which time it will be sold for $6,823.00. The second, RayCool 8, costs $41,997.00 to install, $2,156.00 to operate per year for 5 years at which time it will be sold for $9,087.00. The firm’s cost of capital is 6.03%. What is the equivalent annual cost of the AC360? Assume that there are no taxes.

1b.) The same firm is also considering replacing the existing industrial air conditioning unit. They will pick one of two units. The first, the AC360, costs $26,940.00 to install, $5,096.00 to operate per year for 7 years at which time it will be sold for $7,115.00. The second, RayCool 8 now costs $41,542.00 to install, $2,067.00 to operate per year for 5 years at which time it will be sold for $8,951.00. The firm’s cost of capital is 5.17%. What is the equivalent annual cost of the RayCool8? Assume that there are no taxes.

Round to 2 decimal places.

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Answer 1