You own a rental building in the city and are interested in replacing the heating system. You are faced with the following alternatives:

a. A gas heating system, which will cost $5,000 to install and $1,000 a year to run and will last twenty years.

b. An oil heating system, which will cost $3,500 to install and $1,200 a year to run and will last fifteen years.

If your opportunity cost of capital is 10%, which of these two options is better for you? These two projects have different lives, so use Equivalent Annuity rule to find the answer.

Select one:

a. Choose gas heating system

b. The two projects are equivalent, you'd be indifferent.

c. Choose oil heating system