A dry cleaning companies equipment is approaching the end of its usable life. The owner uses a traditional dry cleaning method which uses percloroethylene but is thinking of switching to wet cleaning which uses water soluble cleaners. Wet cleaning equipment is more expensive to purchase than dry cleaning equipment so the owner has asked you to evaluate which alternative to chose. He has provided you with the following information.
Dry Cleaning percloroethylene equipment capital cost $54,000
Wet Cleaning equipment capital cost $65,000
Predicted economic life for either set of equipment $5 years
Percentage interest rate for small business bank loan 5%
Anticipated net yearly operational savings with wet cleaning $5,000
Based on financial considerations alone, which alternative would you chose? Show work