Sarti Corporation (SC) is planning to purchase one unit of new heavy-duty concrete pump. The company currently encounters a severe capital rationing, so it can afford to invest in only one unit. The production manager of the company, Ms. C. Baglioni, has narrowed the choice down to two options: HDM pump and RB pump.

HDM pump requires an initial cash outflow of $102,000, which then generates positive after-tax cash flows of $65,000 at the end of each of the next two years.The HDM pump can be replaced with the identical model every two years while the cash inflows and outflow remaining the same.

RB pump also requires an initial cash outflow of $102,000 to generate positive after-tax cash flows of $50,000 at the end of each of the next three years.RB pump can be replaced every three years, but each time that it is replaced, both the cash inflows and outflows increase by 11 percent.

The company must have concrete pump for six years, after which time the company plans on closing the driveway construction division of the company, at the end of sixth year both pumps have no market value. SC uses a weighted average cost of capital of 13.75 percent for both projects.

a)Which project do you advise the SC to purchase using NPV, without adjustment for life difference? Please explain.

b)To adjust for their life difference, you use the replacement chain and Equivalent Annual Annuity (EAA). Which project do you advise the SC to pick now? Please explain.

c)Which pump creates the most value to the company? Why? Please explain.