BYO University is faced with the decision of which word processor to purchase for its typing pool. It can buy 10 Bang word processors which cost \($8,000\) each and have estimated annual, year-end maintenance costs of \($2,000\) per machine. The Bang word processors will be replaced at the end of year 4 and have no value at that time. Alternatively, BYO could buy 11 IOU word processors to accomplish the same work. The IOU word processors would need to be replaced after three years. They cost only \($5,000\) each, but annual, year-end maintenance costs will be \($2,500\) per machine. A reasonable forecast is that each IOU word processor will have a resale value of \($500\) at the end of three years.

The university’s opportunity cost of funds for this type of investment is 14 percent.

Because the university is a nonprofit institution, it does not pay taxes. It is anticipated that whichever manufacturer is chosen now will be the supplier of future machines. Would you recommend purchasing 10 Bang word processors or 11 IOU machines?