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The Construction Company is considering the purchase of a new tunnel-boring machine. It has two options: Option A: The cost is $1,000,000, with a useful
The Construction Company is considering the purchase of a new tunnel-boring machine. It has two options: Option A: The cost is $1,000,000, with a useful life of 4 years and an estimated residual value of $0. Option B: The cost is $1, 500,000, with a useful life of 4 years and an estimated residual value of $0. Currently, the company rents a tunnel-boring machine. If the machine is purchased, annual rental payments of $400,000 would be saved. Option B would save this same amount, and would have an additional savings in labor costs of $100,000 each year, because of the greater capabilities of that machine. REQUIRED Compute the payback period of each option.. Calculate the net present value of each option assuming a cost of capital of 8%. The present value factor of an annuity for 4 years at 8% is 3.3121. Determine the profitability index assuming a cost of capital of 8%. Based on the above analysis, which option should the company pursue, and why
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