Question

Lobo is a leading manufacturer of positronic brains, a key component in robots. The company is considering two alternative production methods. The costs and lives associated with each are:

Year	Method 1				Method 2
0		$	6,700			$	9,900
1			400				620
2			400				620
3			400				620
4							620

Suppose all the costs are before taxes and the tax rate is 39%. Both types of equipment would be depreciated at a CCA rate of 25% (Class 9), and would have no value after the project. What are the EACs in this case (r = 13%)? (Negative answers should be indicated by a minus sign. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.)

	EAC
Method 1	$
Method 2	$

Which is the preferred method?

• Method 1

• Method 2

Answer 1

EAC

Method 1 : $ 5,068.78

Method 2 : $ 6,665.65

Preffered Method : Method 1 because it has lower EAC

Workings