A Janitorial Services Firm Is Considering Two Brands of Industrial

question 44

Multiple Choice

A janitorial services firm is considering two brands of industrial vacuum cleaners to equip their staff. Option A will cost $1,500, require servicing of $200 per year, and it will last five years. Option B will cost $1,000, require servicing of $100 per year, and it will last three years. If the cost of capital is 8%, which is the better option, given that the firm has an ongoing requirement for vacuum cleaners?

• A) Option A, since it has a lower equivalent annual annuity.
• B) Option B, since it has a lower equivalent annual annuity.
• C) Option A, since it has a greater equivalent annual annuity.
• D) Option B, since it has a greater equivalent annual annuity.

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Definitions:

Money Demand Curve

A graphical representation showing the relationship between the quantity of money people want to hold and the interest rate, under the assumption that all other determinants of demand are unchanged.

Nominal Interest Rate

The interest rate actually paid for a loan, not adjusted for inflation.

Hyperinflation

A very high and typically accelerating rate of inflation, often exceeding 50% per month, leading to a rapid erosion of real value in the local currency.

Depression

A severe and prolonged downturn in economic activity, characterized by significant declines in GDP, high unemployment, and deflation.