Reference no: EM131900670

Company X tries deciding between two different production quality control systems (A and B). System A has an initial outlay of $360,000, has a four – year life, and requires $105,000 in pretax annual operating cost. System B costs $480,000 today but has a six year life, and requires $65,000 in pretax annual operating cash costs. Both systems are to be depreciated straight – line to zero book value over their lives but both systems are estimated to have a market value which is 15% of the purchase price. Whichever system is chosen, it is likely that it will be replaced if it wears out, with the same system (hence you can base your decision on equivalent annual cost). If the tax rate is 34 percent and the discount rate is 12 percent, which system should the company choose?