Comparison of two long-term alternatives Mr. Freemore is installing a new swimming pool in his back yard. Among the equipment suggested by the pool contractor is an automatic electrolytic chlorinator that costs $800. It operates by electrolyzing a saline solution, and requires the use of one bag of salt every 3 months. The salt costs $9 per bag, and a year's supply comes with the chlorinator. The power required to operate the chlorinator is estimated to cost $40 per year. The equipment has a useful life of 10 years and no salvage value. The pool contractor recommends it because "it pays for itself in 4 years."

Without the automatic chlorinator it will be necessary for Mr. Freemore to buy chlorine compounds used for pool treatments. The cost of chemical treatments is an average of $200 per year. If he decides to use chemicals instead of the automatic equipment, Mr. Freemore plans to buy a year's supply as soon as the pool is completed.

Mr. Freemore would like to analyze the two alternatives using 15 percent as the relevant interest rate.

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REQUIRED a. Use discounted cash flows to compare the two alternatives' cost over the 10-year life and determine which is preferrable. b. Discuss the basis of the contractor's statement about the equipment paying for itself in 4 years. c. Recommend which alternative should be selected.