Cannibus Imports Inc. is considering a service contract for its maintenance work. One firm has offered a four-year contract for $215,000 up front, while another firm has offered a six-year contract for $340,000 up front. The firm will be able to save $81,000 per year under either contract because its employees will no longer have to do the work themselves.

a. If the firm's cost of capital is 6%, which project should be selected? Show NPV and EAA capital budgeting techniques. Justify your answer using the most appropriate of these techniques.

b. If the firm's cost of capital is 4%, does it change the decision?

Please show calculation, thank you.

K N O P Q R CFO CF1 CF2 Project A (215,000) 81,000 81,000 81,000 81,000 CFO CF CF2 Project B (340,000) 81,000 81,000 81,000 81,000 81,000 81,000 CF3 CF3 CF4 CF4 CF5 CF5 CF6 CF6 29 a) 6.0% Project A 4.0% Project A Project B Project B 31 32 NPV n= EAA (PMT) = Decision: NPV n = EAA (PMT) = Decision: 34 35