Question

Matta Manufacturing is trying to decide between two different conveyor belt systems. System A costs $280,000, has a four-year life, and requires $85,000 in pretax annual operating costs. System B costs $396,000, has a six-year life, and requires $79,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 35 percent and the discount rate is 9 percent. Calculate the EAC for both conveyor belt systems. (Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) System A -6677.23 System B Which conveyor belt system should the firm choose? System A • System B

Answer 1

System A System B Year pv @ 9% Year pv @ 9% cash flows -$280,000.00 Present value -$280,000.00 cash flows -$396,000.00 Present value -$396,000.00 -$30,750.00 (-85000*(1- 35%))+(280000/4*0.35) 0.91743 -$28,211.01 -$28,250.00 (-79000*(1- 0.35))+(396000/6*0.35) 0.91743 -$25,917.43 -$30,750.00 -$30,750.00 -$30,750.00 0.84168 0.77218 0.70843 -$25,881.66 -$23,744.64 -$21,784.08 -$379,621.39 -$28,250.00 -$28,250.00 -$28,250.00 -$28,250.00 -$28,250.00 0.84168 0.77218 0.70843 0.64993 0.59627 -$23,777.46 -$21,814.18 -$20,013.01 -$18,360.56 -$16,844.55 $522,727.20 NPV NPV PVIFA(9%,4) 3.2397 PVIFA(9%,6) 4.4859 EAC = NPV/PVFIA -$117,177.23 EAC = NPV/PVFIA -$116,526.23 Choose system B Choose system B as having low EAC.