Question
Fiber Glasses must choose between two kinds of facilities. Facility 1 costs $2 million and its economic life is 7 years. The maintenance costs for
Fiber Glasses must choose between two kinds of facilities. Facility 1 costs $2 million and its economic life is 7 years. The maintenance costs for facility 1 are $60,000 per year. Facility 2 costs $2.8 million and its lasts 8 years. The annual maintenance costs for facility 2 are $100,000 per year. Both the facilities are fully depreciated by the straight-line-depreciation method. The facilities will have no residual values after their economic lives. The corporate tax rate is 34 percent. Revenues from the facilities are the same. The company is assumed to generate sufficient revenue to take tax advantage of depreciation. If the appropriate discount rate is 10 percent, which facility should Fiber Glass choose?
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