Metal Ltd is looking at producing power boards. The company is considering alternative production methods. The costs (in million) and lives associated with each are:
Model
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Model 1
-$90
-$2
-$2
-$2
Model 2
-$80
-$8
-$8
-$8
-$8
-$8
Assume the discount rate is 10%, which model should Metal buy?
a.Metal Ltd should choose Model 1 as its annual equivalent cost is lower.
b.Metal Ltd should choose Model 1 as its annual equivalent cost is higher.
c.Metal Ltd should choose Model 2 as its annual equivalent cost is lower.
d.Metal Ltd should choose Model 2 as its annual equivalent cost is higher.