Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the

Question:

Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the SAL 5000 and the HAL 1000. Gold Star would need 9 SALs, and each SAL costs $3,700 and requires $500 of maintenance each year. At the end of the computer's eight-year life, Gold Star expects to sell each one for $200. Alternatively, Gold Star could buy seven HALs. Each HAL costs $4,400 and requires $550 of maintenance every year. Each HAL lasts for six years and has a resale value of $220 at the end of its economic life. Gold Star will continue to purchase the model that it chooses today into perpetuity. Gold Star has a 34 percent tax rate. Assume that the maintenance costs occur at year-end. Depreciation is straight-line to zero. Which model should Gold Star buy if the appropriate is 11 percent?
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...