Question

Three types of drill bits can be used in a certain manufacturing operation. A bright high-speed steel (HSS) bit is the least expensive to buy, but it has a shorter life than either gold oxide or titanium nitride bits. The HSS bits will cost $3500 to buy and will last for 3 months under the conditions in which they will be used. The operating cost for the HSS bits will be $2000 per month. The gold oxide bits will cost $6500 to buy and will last for 6 months, with an operating cost of $1500 per month. The titanium nitride bits will cost $7000 to buy and will last 6 months with an operating cost of $1200 per month. Using an Annual Worth analysis and an interest rate of 12%/yr compounded monthly, which type of bit would you recommend? Explicitly state any assumptions you must make.