What is the annuity-equivalent cost of each model

Assignment Help Financial Management

Reference no: EM131185877

The Rocket Production Corporation has a project with unequal economic lives and operating costs of two types of equipment. They have asked you to help them in resolving their capital budgeting dilemma. The project involves a standard model that cost $50,000 and will have a useful life of four years. Operating costs are expected to be $4000 per year. The superior model cost $90,000 and will have a useful life of six years. It's operating costs are expected to be $2500 per year. Both models will be able to operate at the same level of output and quality and generate the same cash earnings. The farms cost of capital is 8%.

A. Compute the present values of the cash costs over the useful life of each model.

B. Candidate to present values be compared? If not, why not?

C. What is the annuity-equivalent cost of each model?

D. What model should the company purchase? Please explain your reason for selection.

Reference no: EM131185877

Questions Cloud

What is the safety stock in this case : If the company wants to be 99% con?dent that the stock-out condition will not occur, what should be the reorder point? What is the safety stock in this case?

Difference between the efficiency of a tax system : In 350 words - Analyze the difference between the efficiency of a tax system and the equity of a tax system as it refers to the costs imposed on taxpayers using the benefits principles?

How many rights will it investor need to buy one dmz share : The firm Davis, Martin and Zanders, Inc. (DMZ)has announced that it will issue 10 million shares of common stock through a rights issue at a subscription price of $20. Before the announcement, DMZ shares were trading at $26, and there were 50 million..

Price of refrigerators always : Suppose that the price of refrigerators always changes at the rate of the economy's inflation. A refrigerator sells for $1,100 today, but the same refrigerator sold for $1,000 one year ago. A bank deposit of $100 a year ago earned 4% interest over..

What is the annuity-equivalent cost of each model : The Rocket Production Corporation has a project with unequal economic lives and operating costs of two types of equipment. They have asked you to help them in resolving their capital budgeting dilemma. Compute the present values of the cash costs ove..

Describe the reasons for disney''s adoption of itil : Discuss the type of challenges a large organization such as Disney likely encountered during the ITIL implementation. How can these challenges be overcome?

Game theory apply to personal relationships : Can someone help me answer and understand the following questions. In what circumstances is aggression rational and in what circumstances is cooperation rational? How does game theory apply to personal relationships, especially ongoing ones?

Determines the supply of goods and services : The classical model, what determines the supply of goods and services? What underlyingassumptions lead to GDP being constant at its full-employmentvalue? What is meant by the term constant returns to scale?

Discuss the trade-offs that management must consider : Suggest how Tyson Furniture might allocate its $100,000 cash among these four opportunities. Discuss the trade-offs that management must consider.

User Account

All Pages