Problem
Blooper industries must replace its purification system. Quick & Dirty Systems sells a relatively cheap purification system for $10M that lasts 5 years. Do-It-Right sells a sturdier system for $12M that lasts for 8 years. Both systems entail $1M in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives. The firm's tax rate is 30% and its discount rate is 12%.
1) What is the equivalent annual cost of investing in the cheap system?
2) What is the equivalent annual cost of investing in the expensive system?
3) Which system is preferred?