You are trying to pick the least-expensive equipment for your manufacturing operations. You have two choices:

the Hi-Quality, which will cost $40,000 to purchase and which will have OCF of -$2,000 annually throughout the equipments expected life of 5 years;

and Lo-Budget, which will cost $20,000 to purchase and which will have OCF of -$5,000 annually throughout that vehicle expected three-year life. Both pieces of equipment will be worthless at the end of their life. If you intend to replace whichever type of equipment you choose with the same thing when its life runs out, again and again out into the foreseeable future. Your business has a cost of capital of 10 percent. One iteration of each delivery equipment will consist of the following cash flows:

Year 0 1 2 3 4 5

Hi-Quality CFs -$40,000 -$2,000 -$2,000 -$2,000 -$2,000 -$2,000

Lo-Budget CFs -$20,000 -$5,000 -$5,000 -$5,000

Calculate the equivalent annuity cost (EAC) for each piece of equipment. Which one should you choose?

PLEASE SHOW FORMULAS