Casa Chica Is Considering Replacing a Piece of Equipment

question 20

Multiple Choice

Casa Chica is considering replacing a piece of equipment.Alternative A costs $80,000, has an eight year life and would produce net cash flows of $18,000 in each of the eight years.Alternative B costs $65,000, has a six year life and would produce net cash flows of $18,000 in each of the six years.If Chica's cost of capital is 13 percent, which alternative should be chosen using the equivalent annual annuity method?

• A)Project A
• B)Project B
• C)Indifferent between the two projects
• D)Neither, because both projects have a negative NPV

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Definitions:

Porter's Model

A strategic tool developed by Michael Porter to analyze the competitive environment of an industry, including forces such as competition intensity, potential entrants, substitution threats, bargaining power of suppliers, and customers.

Strategically

Involving or pertaining to the identification of long-term or overall aims and interests and the means of achieving them, often applied in business, military, or organizational planning.

Big Picture

A general perspective or broad overview of a situation or concept.

Competitive Scope

The range or breadth of fields or markets in which an organization competes.