The Republic of Fredonia is purchasing new equipment for its fire department, to include two new fire tracks and an ambulance. Vendor A costs less upfront, but will not last as long and costs more to maintain. Vendor B is more expensive to acquire but has a less expensive maintenance contract and a longer operating life. Follow the steps below to compare to relative costs of the two options using the annualized cost method.

Assumptions:

Vendor A will supply equipment at an upfront cost of $$1\mathrm{.}4$ million, with an annual maintenance contract of $$12,000.$ The equipment is expected to last $20$ years.

The equipment from Vendor B will cost $$1\mathrm{.}8$ million, and will require maintenance at a contracted cost of $$8000$ per year. This equipment will have a $30-$year operating life.

Assume a $6$ percent discount rate.

A$.$ Use Excel to calculate the present cost of the two options. The formula is to add PV of the contracted maintenance costs to the acquisition cost, assumed to happen in T$0.$ B$.$ Use the PMT function in excel to calculate the annualized cost of each contract, with the respective operating lives and a $6$ percent discount rate.