GSU Motor Works needs to select an assembly line for producing their new SUV. They have two options: • Option XYZ is a highly automated assembly line that has a large up-front cost but low maintenance cost over the years. This option will cost $114 million today with a yearly operating cost of $40 million. The assembly line will last for 6 years and be sold for $48 million in 6 years. • Option GHI is a cheaper alternative with less technology, a longer life, but higher operating costs. This option will cost $168 million today with an annual operating cost of $32 million. This assembly line will last for 10 years and be sold for $23 million in 10 years. The firm’s cost of capital is 16%. Assume a tax rate of zero percent. The equivalent annual cost (EAC) for Option XYZ is $_______ million. The equivalent annual cost (EAC) for Option GHI is $_______ million.
GSU Motor Works needs to select an assembly line for producing their new SUV. They have two options:
• Option XYZ is a highly automated assembly line that has a large up-front cost but low maintenance
cost over the years. This option will cost $114 million today with a yearly operating cost of $40
million. The assembly line will last for 6 years and be sold for $48 million in 6 years.
• Option GHI is a cheaper alternative with less technology, a longer life, but higher operating costs.
This option will cost $168 million today with an annual operating cost of $32 million. This
assembly line will last for 10 years and be sold for $23 million in 10 years.
The firm’s cost of capital is 16%. Assume a tax rate of zero percent.
The equivalent annual cost (EAC) for Option XYZ is $_______ million.
The equivalent annual cost (EAC) for Option GHI is $_______ million.
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