L web is bidding to provide web services for a company. The company pays its cur

Question

L web is bidding to provide web services for a company. The company pays its current provider $10,000 per year for hosting its web page, handling transactions, etc. L web figures that it will need to purchase equipment worth $14,900 up front and then spend $2,000 per year to provide the service for 3 years. If L web's cost of capital is 9.9%, can it bid less than $10,000 per year to provide the service and still increase its value by doing so? Hint:This is an "equivalent annual cost (EAC)" problem. It is asking for the EAC. You may use excel or a financial calculator.

Explanation / Answer

Yes they can bid for it.

Asset price 14900 Discount rate 9.90% Year 0 1 2 3 Amount -14900 8000 8000 8000 EAC Rs. 4,576.79

Yes they can bid for it.

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