Question

A local small business owner has asked for your help in selecting a new phone system. The alternatives she is considering are shown on the table below:

                                                Plan A                            Plan B

Initial Investment                     $50,000                           $120,000
Annual Maintenance Cost       $9000                              $6000
Salvage Value                         $10000                            $20000
Life                                          20 years                         40years

If the required return is 8%, depreciation is straight-line ,the annual tax rate is .4, and the phone system will be replaced, use the EAC method to find which system is best.

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Equivalent Annual Cost Calculation

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