1. Harper Hospital is considering bids from two contractors to renovate its endocrinology unit in order to enhance efficiency and increase patient satisfaction. Contractor 1 bid $260,000 for the job. The renovations would be guaranteed for 15 years with annual maintenance costs of $11,500 per year. Contractor 2 bid $305,000 for the job and would also guarantee the renovations for 15 years. The annual maintenance costs would be $7,500 per year if Harper Hospital selected Contractor 2. All maintenance costs are paid at the end of each year.

a. Assuming Harper Hospital uses a discount rate of 5.25%, which contractor should the hospital choose?

b. If Contractor 2 instead offered to guarantee the renovations for 16 years at a cost of $7,500 per year, which contractor should the hospital choose now, assuming all else equal?