Question 3: (15 points). (Related to Checkpoint 11.2) (Equivalent annual cost calculation) Barry Boswell is a financial analyst for Dossman Metal Works, Inc. and he is analyzing two alternative configurations for the firm's new plasma cutter shop. The two alternatives that are denoted A and B below perform the same task and although they each cost to purchase and install they offer very different cash flows. Alternative A has a useful life of 7 years whereas Alternative B will only last for 3 years. The after-tax cash flows from the two projects are as follows:

Year Alternative A Alternative B

0 $(95,000) $(95,000)

1 (19,000) (5,000)

2 (19,000) (5,000)

3 (19,000) (5,000)

4 (19,000)

5 (19,000)

6 (19,000)

7 (19,000)

a. Calculate each project's equivalent annual cost (EAC) given a discount rate of 10 percent. (Round to the nearest cent.)

a. Alternative A's equivalent annual cost (EAC) at a discount rate of 10% is:
b. Alternative B's equivalent annual cost (EAC) at a discount rate of 10% is

b. Which of the alternatives do you think Barry should select? Why? (Select the best choice below.)

a. This cannot be determined from the information provided.

b. Alternative B should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative A.

c. Alternative A should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative B.

d. Alternative A should be selected because it has the highest NPV.