Office Automation, Inc., is obliged to choose between two copiers, XX40 or RH45. XX40 costs less than RH45, but its economic life is shorter. The costs and maintenance expenses of these two copiers are given as follows. These cash flows are expressed in real terms.
|
Copier
|
Year 0
|
Year 1
|
Year 3
|
Year 4
|
Year 5
|
|
XX40
|
$700
|
$100
|
$100
|
|
|
|
RH45
|
900
|
110
|
110
|
$110
|
$100
|
The inflation rate is 5 percent and the nominal discount rate is 14 percent. Assume that revenues are the same regardless of the copier, and that whichever copier the company chooses, it will buy the model forever. Which copier should the company choose? Ignore taxes and depreciation.