Question

Pags Industrial Systems Company (PISC) is trying to decide between two different conveyor belt systems. System A costs $405,000, has a three-year life, and requires $105,000 in pretax annual operating costs. System B costs $450,000, has a five-year life, and requires $60,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever project is chosen, it will not be replaced when it wears out. If the tax rate is 34% and the discount rate is 20%, which project should the firm choose?

PLEASE WRITE OUT CALCULATIONS AND SHOW WORK

Answer 1

System A: YEAR 0 cash flows $405,000 $23,400 $23,400 $23,400 calculation pv @ 20% | discounted cash flows 1.0000 105000*0.66)+(405000/3*0.34)0.8333 0.6944 0.5787 $405,000.00 $19,500.00 $16,250.00 $13,541.67 $454,291.67 2 NPV System B: YEAR 0 cash flows $450,000 $9,000 $9,000 $9,000 $9,000 -$9,000 calculation pv @ 20% | discounted cash flows 1.0000 (-60000*0.66)+(450000/5*0.34)0.8333 0.6944 0.5787 0.4823 0.4019 $450,000.00 $7,500.00 $6,250.00 $5,208.33 $4,340.28 $3,616.90 $476,915.51 2 4 NPV Choose System A