Your company is considering whether to update the old machinery $($Option A$),$ or to purchase the new one $($Option B$).$ Updating the old machinery will cost $$1$ million today, and operating it will cost $$5$ million every year for $3$ years, after which it will be scrapped. New machinery will cost $$9$ million today, and its operation will cost $$4$ million per year for the next $5$ years, after which it will be scrapped. Assume that both the old $($A$)$ and the new $($B$)$ will be able to produce the same output. Which option should your company choose, and why?

Question $6$ Answer

a$.$

Option A$,$ because its IRR is larger

b$.$

Option B$,$ because its equivalent annual cost is smaller

c$.$

Option B$,$ because its IRR is larger

d$.$

Option B$,$ because the present value of its total costs is smaller.

e$.$

Option A$,$ because its equivalent annual cost is smaller

f$.$

Option A$,$ because the present value of its total costs is smaller.