Calculation of the equivalent annual cost of Harwell University
Harwell University must purchase word processors for its typing lab. The university can buy 10 EVF word processors that cost $8,000 each and have annual, year-end maintenance costs of $2,000 per machine. The EVF word processors will be replaced at the end of year 4 and have no value at that time. Alternatively, Harwell can buy 11 AEH word processors to accomplish the same work.
The AEH word processors will be replaced after three years. They each cost $5,000 and have annual, year-end maintenance costs of $2,500 per machine. Each AEH word processor will have a resale value of $500 at the end of three years. The university’s opportunity cost of funds for this type of investment is 14 percent. Because the university is a nonprofit institution, it does not pay taxes. It is anticipated that whichever manufacturer is chosen now will be the supplier of future machines.
Would you recommend purchasing 10 EVF word processors or 11 AEH machines?