Problem Statement: O'Donnell Corp. is need of new machinery for its plant and is considering two different brands as replacements. Information about the two options are as follows:
Correa Co. Grant Inc
Cost (cash price) $100,000 $90,000
Operating costs per year $7,000 $8,000
Estimated useful life 8 8
Estimated residual (salvage) value as percent of cost 20% 10%
Assume all other variables are identical for the two machines. O'Donnell's cost of capital is 8%.
a. Analyze and compare the relative cost of the two machines. Costwise, which is better?
b. What other factors should O'Donnell consider besides the numbers?