91. Dobson Contractors considering buying equipment at a cost of $75,000.

Question : 91. Dobson Contractors considering buying equipment at a cost of $75,000. : 1412661




Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. Interest is at 12%. Assume the equipment purchase would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations.


Determine if Dobson should purchase the machine.








Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 plus annual license renewals of $1,000 for three years, which includes technical support. Option B will cost $20,000 with technical support being an add-on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. Interest is at 8%. Ignore income taxes.


Determine which option should be chosen based on present value considerations.








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