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Project Evaluation. Blooper Industries must replace its magnoosium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $10 million. The system will last 5 years. Do-It-Right sells a sturdier but more expensive system for $12 million; it will last for 8 years. Both systems entail $1 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The firms tax rate is 35%, and the discount rate is 12%. Which system should Blooper install? ( Hint: Check the discussion of equivalent annual annuities in the previous chapter.)IOperating costs Investment Project life Annual depreciation Depreciation tax shield PV(depreciation tax shield)* Net capital cost EAC of net capital cost* Quick and Dirty $1 million $10 milliorn 5 years $2 million $0.700 million $2.523 million $7.477 million $2.074 million Do-lt-Right $1 million 12 million 8 years $1.5 milliorn $0.525 million $2.608 million $9.392 million $1.891 million

I don't understand why we don't include the operating cost for our calculations?

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Answer #1

I don't understand why we don't include the operating cost for our calculations?

operating cost of both option are same hence there in no incremental benefit or loss on account of operating cost hence its ignored because it doesnt have impact on capital budgeting decision .

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