A company buys a color printer that will cost $16,000 to buy, and last 5 years. It is

assumed that it will require servicing costing a fixed lump sum each year of $500.

Compare this option to a second, where the firm buys a 6 year contract for Kinko printing

services with an annual end of year expense of $4,500. Cost of capital is rE=8%. Which

printer option should you choose?

Purchase a

Printer

Kinko Expense

Cost of Capital rE 8% 8%

Initial Cost of Printer CF0 16,000 0

End of Year Servicing Costs CFt 500 4,500

n 5 6

Draw the time line for both options and make a choice. Explain your choice numerically.