If the cost of capital is 8%, the best option is the B, which will cost $1000, require $100 maintenance per year, and will last for three years. Because this option will have an equivalent higher annual annuity.
To better understand, let's calculate the annual annuity for each option.
<h2>Option A:</h2>
Cost = $1,500.00
Maintenance cost = $200.00
Life period = 5 years
Cost of capital = 8%
To calculate it is necessary to consult the PVIFA calculator, so we have:
Equivalent annual annuity = [$1,500.00 + ($200.00 x PVIFA8%.5)] / PVIFA8%,5
[$1,500.00 + ($200.00 x 3.9927)] / 3.9927
= $575.68
<h2>Option B:</h2>
Cost = $1,000.00
Maintenance cost = $100.00
Lifespan = 3 years
Cost of capital = 8%
Using the same formula we have:
Equivalent annual annuity = [$1,000.00 + ($100.00 x PVIFA8%,3)] / PVIFA8%,3
= [$1,000.00 + ($100.00 x 2,5771)] / 2,5771
= $488.03
Therefore, it is concluded that option B is the most effective for the company.
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