A bank can purchase an additional ATM (automated teller machine) for $110,000 that has an estimated life of 6 years. Maintenance over that period will begin at $2,500 annually and increase by 8% per year. The ATM can be depreciated to no value during its useful life and has no resale value at that time. If the ATM is purchased, the bank will not be required to hire one additional (human) teller. Including fringe benefits, the teller cost $20,000 per year, and this amount is expected to increase 5% annually. On average, a teller leaves the position and needs to be replaced in four years. If the bank’s cost of capital is 10%, and it pays the corporate tax rate of 30%
1- What are the present values of the costs of acquiring one ATM and of employing one teller?
a.
b.
2- What are the equivalent annual costs of acquiring one ATM and of employing one teller?
a-
b-
3- What alternative should be selected?
a- The ATM
b- The Teller
c- There is not enough information to determine the better alternative