You Are Evaluating Two Different Cookie-Baking Ovens

question 33

Multiple Choice

You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $25,000, has a six-year life, and has an annual OCF (after-tax) of −$5,000 per year. The Keebler Cookie Munster costs $40,000, has a seven-year life, and has an annual OCF (after-tax) of −$500 per year. If your discount rate is 10 percent, what is each machine's EAC?

• A) Pillsbury: −$11,594.9, Keebler: $8,716.22
• B) Pillsbury: −$11,594.94, Keebler: −$9,145.62
• C) Pillsbury: −$10,740.18, Keebler: −$9,145.62
• D) Pillsbury: −$10,740.18, Keebler: −$8,716.22

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Definitions:

Mechanism Design

A field in economics and game theory that seeks to design rules or incentives for a system to achieve a desired objective, considering individuals' private information and incentives.

Welfare Policy

A governmental strategy designed to support the wellbeing of citizens, often through financial aid, healthcare, and education.

Health Insurance

A type of insurance that covers the whole or part of the risk of a person incurring medical expenses, spreading the risk over numerous individuals.

Adverse Selection

A situation in which sellers have information that buyers do not have, or vice versa, leading to an inefficient market outcome.