A company is looking at new technology options.

Option 1 costs $16 million initially, has an annual operating cost of $320,000, and a life of 10 years before it is replaced.

Option 2 costs $14 million initially, has an annual operating cost of $450,000, and a life of 8 years before it is replaced.

What is the equivalent annual cost for each machine, if the required return is 11%?

The Boss is emphatic that the decision should be made based on the annual operating costs, only, saying that present value calculations will complicate this relatively simple decision unnecessarily, and should be avoided. According to the boss, Option 1 is the best choice.

Which option should the company purchase and why?.