Question: Solatron is trying to decide between two different types of production lines for its new solar panel manufacturing facility. They plan to make and sell solar panels indefinitely, so if a production line wears out it must be replaced.
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Option A
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Option B
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Cost
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$200,000
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$300,000
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Useful Life
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4 years
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6 years
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Pretax annual operating costs
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$70,000
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$50,000
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Solatron uses straight-line depreciation, has a tax rate of 40% and uses a discount rate of 10%.
A. What is the Operating Cash Flow for Option A and Option B?
B. What is the Equivalent Annual Cost for Option A?
C. What is the Equivalent Annual Cost for Option B?
D. Which option should Solatron select? Why?