Least-Cost Decision
Response to the following problem:
The local fire department has determined the Sleep-Eazy Mattress Company is not in full compliance with local fire regulations. To comply, Sleep-Eazy has two alternatives: It may install an automatic sprinkler system, or it may hire a fire safety expert to make weekly fire safety checks. The automatic sprinkler system will cost $125,000, including installation charges, and will last for 10 years. It will have no salvage value. The entire system is virtually maintenance-free. The fire safety expert's fee is $18,000 per year. The cost of capital is 10%.
Which alternative should Sleep-Eazy Mattress Company choose? Why?