A company wishes to select the best of three possible computers, each expected to meet the University's growing need for computational and storage capacity. The three computers— A, B, and C—are equally risky. Computer A will require an initial outlay of $50,000 while computer B will cost $35,000 and computer C costs $60,000. The University plans to use a 12% cost of capital to evaluate each of them. The initial outlay and annual cash flows over the life of each computer are shown in the following table:
Year Computer A Computer B Computer C
1 $7,000 $5,500 $18,000
2 7,000 12,000 18,000
3 7,000 16,000 18,000
4 7,000 23,000 18,000
5 7,000 - 18,000
6 7,000 - -
A. Calculate the NPV for each computer over its life. Rank the computers in descending order based on their NPVs.
B. Use the equivalent annual cost approach to evaluate and rank the computers in descending order based on the EAC criterion.
C. Compare and contrast your findings in parts (a) and (b). Which computer would you recommend that the University acquire? Why?