Question (20 Marks) General Motors (GM) is evaluating a maintenance contract for its heavy equipment. One company has offered GM a four-year contract for R100,000 to be paid in advance. Another company has offered an eight-year contract for R165,000, also to be paid in advance. GM will be able to save R34,000 per year under either contract because its employees will no longer have to do the work themselves.

Required

1. If GMs cost of capital is 10%, which project should be selected? Use both the replacement chain and the equivalent annuity (EAA) method to justify your answer. [12]

2. If GMs cost of capital is 12%, does it change the decision? What about 14%? [8]