A company is evaluating two different irrigation system options. An underground automatic irrigation system will cost $9.2 million to install and $80,000 pre-tax annually to operate. It will not have to be replaced for 20 years. An aboveground system will cost $6.8 million to install, but $190,000 per year to operate.

The aboveground equipment has an effective operating life of nine years. The company leases its land from the city and both systems are considered leasehold improvements; as a result, straight-line capital cost allowance is used throughout, and neither system has any salvage value. The tax rate is 39%.

Compute the equivalent annual cost for each method if we use a 13% discount rate:

These answers are wrong:

1,179,054.85,

1,146,341.87