The Rocket Production Corporation has a project with unequal economic lives and operating costs of two types of equipment. They have asked you to help them in resolving their capital budgeting dilemma. The project involves a standard model that cost $50,000 and will have a useful life of four years. Operating costs are expected to be $4000 per year. The superior model cost $90,000 and will have a useful life of six years. It's operating costs are expected to be $2500 per year. Both models will be able to operate at the same level of output and quality and generate the same cash earnings. The farms cost of capital is 8%.
A. Compute the present values of the cash costs over the useful life of each model.
B. Candidate to present values be compared? If not, why not?
C. What is the annuity-equivalent cost of each model?
D. What model should the company purchase? Please explain your reason for selection.