Question
Monsters, Inc. must replace the air conditioning unit in its office. It is evaluating two mutually-exclusive options, with the expectation that units will continue to
Monsters, Inc. must replace the air conditioning unit in its office. It is evaluating two mutually-exclusive options, with the expectation that units will continue to be replaced at the end of their useful lives. Option 1 costs $7,800 and has subsequent annual costs of $700. It lasts 7 years. Option 2 costs $10,200, lasts 10 years, and has an equivalent annual cost (EAC) of $2,097.26. Projects of this risk have a required return, or cost of capital, of 10%. Which option do you choose and why? Justify your decision with a calculation. Clearly label your answer and calculator inputs for possible partial credit.
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