23 You are comparing two water softeners. One is an inexpensive model by a large conglomerate...

23 You are comparing two water softeners. One is an inexpensive model by a large conglomerate (GB) and the other is a deluxe model manufactured by a specialized water treatment company (Kin). The GB costs $800 and the Kin costs $2,395. There are two advantages to the Kin: first, it is mechanical with no electronics, so its expected life is 12 years; second, it is extremely efficient in its use of water and salt. The Kin’s estimated annual operating cost is $190. In contrast, the GB’s estimated operating life is 8 years and its annual operating cost is $246. Since they have unequal lives, you can’t compare the models using NPV. Instead, use the equal annual annuity method (EAA). (Note that the EAA will be negative.) Which model has the highest EAA and by how much? (A higher EAA is less negative.) Assume that operating costs occur at year end starting one year from purchase. Your cost of capital is 4%.

A) *GB has a higher EAA by $80.
B) Kin has a higher EAA by $80.
C) GB has a higher EAA by $60.
D) Kin has a higher EAA by $60.
E) The two projects have equal EAA.

The correct answer is A. Please explain how to get this answer. Thank you!

Expert Solution

jeff jeffy answered 1 year ago

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