Question

Lang Industrial Company (LISC) is trying to decide between two different conveyor belt systems. A cost $204,000 has a four-year life, and requires $66,000 in pretax annual operating cost. System B costs $288,000, has a six-year life, and requires $60,000 in pretax annual operating cost. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever project is chosen, it will not be replaced when it wars out. The tax rate is 35 percent and the discount rate is 10 percent.

Calculate the NPV for both conveyor belt system.

Answer 1

H C26 : X V fx =F25/4 A B C D E F G 23 System A: Operating Depreciati Tax @35% Cash outflows (Operating 24 Year costs I on Total saved on costs costs-Tax saved) PVIF@10% 25 0 204,000 L 1.000 $ 1 $ 66,000 $ 51,000 / $ 117,000 $ 40,950 $ 25,050 1 0 .909 $ 27 2 $ 66,000 $ 51,000 $ 117,000 $ 40,950 $ 25,050 0.826 $ 28 3 $ 66,000 $ 51,000 $ 117,000 $ 40,950 $ 25,050 0.751 $ 29 4 $ 66,000 $ 51,000 $ 117,000 $ 40,950 $ 25,050 0.683 $ $ Present value 204,000.00 22,772.73 20,702.48 18,820.44 17,109.49 Net present value -$283,405.13 33 System A: Operating Depreciati Tax @35% Cash outflows (Operating 34 Year costs on Total saved on costs costs+Tax saved) 35 0 $ 288,000 36 1 $ 60,000 $ 48,000 $ 108,000 $ 37,800 $ 22,200 37 2 $ 60,000 $ 48,000 $ 108,000 $ 37,800 $ 22,200 3 $ 60,000 $ 48,000 $ 108,000 $ 37,800 $ 22,200 39 41 $ 60,000 $ 48,000 $ 108,000 $ 37,800 $ 22,200 40 5 $ 60,000 $ 48,000 $ 108,000 $ 37,800 $ 22,200 6 $ 60,000 $ 48,000 $ 108,000 $ 37,800 $ 22,200 PVIF@10% 1.000 $ 0.909 $ 0.826 $ 0.751 $ 0.683 $ 0.621 $ 0.564 $ Present value 288,000.00 20,181.82 18,347.11 16,679.19 15,162.90 13,784.45 12,531.32 Net present value -$384,686.79 44 Select System A

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