Question
Grocery Wholesalers Incorporated is evaluating some new technology options. Option A costs $16 million initially, has an annual operating cost of $320,000 per year, and
Grocery Wholesalers Incorporated is evaluating some new technology options. Option A costs $16 million initially, has an annual operating cost of $320,000 per year, and a life of 10 years before it is replaced. Option B costs $14 million initially, has an annual operating cost of $450,000 per year and a life of 8 years before it is replaced. What is the equivalent annual cost for each option if the required return is 21%? Ignore taxes. The VP of operations 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 VP, Option A is the best choice. Which option should the company purchase? Discuss.
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