Three years from now (now =Year 0) the equipment that Dark StarTechnologies uses to coat and protect the surfaces on its productswill have to be replaced. Dark Star plans to operate the newequipment for 7 years (Years 4 to 10). The company is consideringtwo procurement options.

Option 1: MAKE the manufacturing equipment in-house. The yearlyacquisition costs associated with developing the equipment in-houseare as follows: Year 1 = $200,000, Year 2 = $700,000, Year 3 =$1,000,000. The Annual Operation & Maintenance Cost of thein-house developed equipment will be $100,000 (Years 4 to 10).Assume the equipment has zero salvage value.

Option 2: BUY manufacturing equipment available from ACMESpecialties. The acquisition cost associated with purchasing theequipment is $1,000,000 (Year 3). The Annual Operation andMaintenance Cost of the manufacturing equipment purchased from AcmeSpecialties will be $300,000 (Years 4 to 10). Assume the equipmenthas zero salvage value. For an interest rate = 10%

a) Calculate the equivalent cost at future Year 3 of Option 1and Option 2. Year 3 is when the system goes into operation, i.e.,the end of the production phase for Option 1 (MAKE) or when thepurchased equipment is ready for use OPTION 2 (BUY).

b) Which option should Dark Star Technologies choose based onequivalent costs?

Please show what equations are used