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The LJB Company must replace a freezer and is trying to decide betweenthe following two alternatives:Item                               Freezer A        Freezer BInvestment required      ($29,000)         ($25,000)Annual electrical bill        (3,000)            (4,000)Salvage value                  6,000               5,000Project life in years           11                   11The LJB Company’s cost of capital is 8 percent.Which investment provides LJB with the lowest total cost?

The LJB Company must replace a freezer and is trying to decide betweenthe following two alternatives:Item                               Freezer A        Freezer BInvestment required      ($29,000)         ($25,000)Annual electrical bill        (3,000)            (4,000)Salvage value                  6,000               5,000Project life in years           11                   11The LJB Company’s cost of capital is 8 percent.Which investment provides LJB with the lowest total cost?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section10.A: Mutually Exclusive Investments Having Unequal Lives
Problem 2P
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The LJB Company must replace a freezer and is trying to decide between
the following two alternatives:
Item                               Freezer A        Freezer B
Investment required      ($29,000)         ($25,000)
Annual electrical bill        (3,000)            (4,000)
Salvage value                  6,000               5,000
Project life in years           11                   11
The LJB Company’s cost of capital is 8 percent.
Which investment provides LJB with the lowest total cost?

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