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Question
The XYZ Cable Company is considering two mutually exclusive lighting systems for a new office building. The company's cost of capital is 12%. Lighting system A (florescent bulbs) costs $40,000, generates costs of $14,000 per year and has a life of 2 years. Lighting system B (LED bulbs) costs $75,000 generates costs of $12,000 per year and has a life of 4 years.
A. Illustrate the 'replacement chain' for dealing with the unequal life problem. (Note: In illustrating this method, use the following assumptions: a replacement for lighting system A will cost $35,000 ar have annual costs of $13,000 per year. Ignore taxes and depreciation i your analysis).
B. Illustrate the 'equivalent annual cost' (EAC) method for evaluating the lighting alternatives (Note: In determining EAC ignore the additional information in Part A above).
C. Illustrate the 'residual value' method for dealing with the unequal life problem (Note: In doing this evaluation, assume a residual value for th LED lighting system of $35,000 in 2 years).
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