Tisla Motors needs to select an assembly line for producing their new SUV. They have two options:
Option A is a highly automated assembly line that has a large up-front cost but low maintenance cost over the years. This option will cost $9 million today with a yearly operating cost of $2 million. The assembly line will last for 5 years and be sold for $5 million in 5 years.
Option B is a cheaper alternative with less technology, a longer life, but higher operating costs. This option will cost $6 million today with an annual operating cost of $3 million. This assembly line will last for 8 years and be sold for $1 million in 8 years.
The firm’s cost of capital is 12%. Assume a tax rate of zero percent. The equivalent annual cost (EAC) of better option should be $_______ million.
a. 3.409
b. 3.552
c. 3.710
d. 3.867
e. 4.127
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