Question

Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems, System A costs $240,000, has a four-year life and requires $75.000 in pretax annual operating costs System B costs $340,000, has a six-year life, and requires $69.000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over the lives and will have zero salvage Value Whichever project is chosen, it will not be replaced when it wears out. The tax rate is 34 percent and the discount rate is 8 percent Calculate the NPV for both conveyor belt systems (Negativi sign. Round your answers to 2 decimal places. (e.g. 13216 s hould be indicated by a minus System A System B Which conveyor belt system should the firm choose? System System

Answer 1

1]	System A:
	Initial cost	$        -2,40,000
	PV of after tax annual operating costs = -75000*(1-34%)*(1.08^4-1)/(0.08*1.08^4) =	$        -1,63,950
	PV of depreciation tax shield = (240000/4)*34%*(1.08^4-1)/(0.08*1.08^4) =	$            67,567
	NPV	$        -3,36,383
	System B:
	Initial cost	$        -3,40,000
	PV of after tax annual operating costs = -69000*(1-34%)*(1.08^6-1)/(0.08*1.08^6) =	$        -2,10,526
	PV of depreciation tax shield = (340000/6)*34%*(1.08^6-1)/(0.08*1.08^6) =	$            89,067
	NPV	$        -4,61,458
	Which conveyor belt system should the firm use.
	System A
2]	EAC of System A = -336383*0.08*1.08^4/(1.08^4-1) =	$   -1,01,561.03
	EAC of System B = -461458*0.08*1.08^6/(1.08^6-1) =	$      -99,820.47
	Which conveyor belt system should the firm use.
	System B