BIG Industries needs computers. Management has narrowed the choices to the SAL 5000 and the DET 1000.
Question:
BIG Industries needs computers. Management has narrowed the choices to the SAL 5000 and the DET 1000. It would need 12 SALs. Each SAL costs $15,900 and requires $1,850 of maintenance each year. At the end of the computer’s six-year life, BIG expects to be able to sell each one for $1,300. On the other hand, BIG could buy 10 DETs. DETs cost $19,000 each and each machine requires $1,700 maintenance every year. They last for four years and have no resale value. Whichever model BIG chooses, it will buy that model forever. Ignore tax effects, and assume that maintenance costs occur at year end. Which model should BIG buy if the cost of capital is 15 percent?
Cost Of CapitalCost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Fundamentals of Corporate Finance
ISBN: 978-0071051606
8th Canadian Edition
Authors: Stephen A. Ross, Randolph W. Westerfield