Happy Trails, Inc must replace the air conditioning unit in its office. It is evaluating two mutually exclusive options, with the expectation that units will continue to replaced at the end of their useful lives. Option 1 costs $7,800 and has subsequent annual costs of $500. It last 7 years. Option 2 costs $9,200, lasts 10 years, and has an equivalent annual cost of $2097.26. Projects of this risk has a required return, or cost of capital, of 10%. Note that both the initial cost and subsequent annual cost are negative. Which option do you chose and why? Justify your decision with a calculation.
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