Problem:
Corcoran Consulting is deciding which of two computer systems to purchase. It can purchase state-of-the-art equipment (System A) for $20,000, which will generate cash flows of $5,000 at the end of each of the next 6 years. Alternatively, the company can spend $10,000 for equipment that can be used for 3 years and will generate cash flows of $5,000 at the end of each year (System B).
Required:
Question 1: If the company's WACC is 10% and both projects can be repeated indefinitely, which system should be chosen?
Question 2: What is its EAA?
Note: Provide specific examples to support your answers.