Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $12 million. The system will last 4 years. Do-It-Right sells a sturdier but more expensive system for $13 million; it will last for 5 years. Both systems entail $2 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 30%, and the discount rate is 12%. a. What is the equivalent annual cost of investing in the cheap system? Note: Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded to 2 decimal places. b. What is the equivalent annual cost of investing in the more expensive system? Note: Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded to 2 decimal places. c. Which system should Blooper install?
Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $12 million. The system will last 4 years. Do-It-Right sells a sturdier but more expensive system for $13 million; it will last for 5 years. Both systems entail $2 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 30%, and the discount rate is 12%. a. What is the equivalent annual cost of investing in the cheap system? Note: Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded to 2 decimal places. b. What is the equivalent annual cost of investing in the more expensive system? Note: Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded to 2 decimal places. c. Which system should Blooper install?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system
for $12 million. The system will last 4 years. Do-It-Right sells a sturdier but more expensive system for $13 million; it will last for 5 years.
Both systems entail $2 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 30%, and the discount rate is 12%.
a. What is the equivalent annual cost of investing in the cheap system?
Note: Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded
to 2 decimal places.
b. What is the equivalent annual cost of investing in the more expensive system?
Note: Do not round intermediate calculations. Enter your answer as a positive value. Enter your answer in millions rounded
to 2 decimal places.
c. Which system should Blooper install?
Answer is complete but not entirely correct.
a. Equivalent annual cost
$
13.63 millions
b. Equivalent annual cost
$
8.20 millions
c. Which system should Blooper install?
Do-It-Right
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