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A Company is considering purchasing one of the following two pieces of equipment.

Equipment A has a purchase price of $3 million and will cost $80,000, pre-tax, to operate on an annual basis. This equipment will have to be replaced every 7 years and has a salvage value of $340,000.

Equipment B on the other hand, has an initial cost of $3.8 million and costs $69,000, pre- tax, annually to operate. This equipment has a useful life of 9 years with a salvage value of $420,000.

Both equipment sets are in an asset class with a CCA Rate of 25% and are otherwise identical. The income tax rate is 38 percent and the appropriate discount rate is 13%.

Which equipment should the company purchase and why?

Please show your calculations and reasoning.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91375826

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