A Garage Is Comparing the Cost of Buying Two Different

question 105

Multiple Choice

A garage is comparing the cost of buying two different car hoists. Hoist A will cost $20,000, will require servicing of $1000 every two years, and last ten years. Hoist B will cost $15,000, require servicing of $800 per year, and last eight years. If the cost of capital is 7%, which is the better option, given that the firm has an ongoing requirement for a hoist?

• A) Hoist A, since it has a greater present value (PV).
• B) Hoist B, since it has a greater present value (PV).
• C) Hoist A, since it has a greater equivalent annual annuity.
• D) Hoist B, since it has a greater equivalent annual annuity.

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Definitions:

Prices Change

The fluctuation in the market price of goods, services, or securities over time due to various economic factors.

Put Option

A put option is a financial contract giving the holder the right, but not the obligation, to sell a specific amount of an asset at a predetermined price within a specific time frame.

Obligation

A duty or commitment to do something or to pay a debt, often legally binding.

Sell

The act of transferring ownership of a product or service from one party to another in exchange for money or other compensation.