Haley Motors is considering a maintenance contract for its heavy equipment. One firm has offered Haley a four-year contract for $100,000. Another firm has offered an eight-year contract for $165,000. Haley will be able to save $34,000 per year under either contract because its employees will no longer have to do the work themselves.
a. If Haley’s cost of capital is 10%, which project should be selected? Use both the replacement chain and the equivalent annual annuity (EAA) method to justify your answer.
b. If Haley’s cost of capital is 12%, does it change the decision? What about 14%?