Question

Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $305,000, has a 4-year life, and requires $105,000 in pretax annual operating costs. System B costs $385,000, has a 6-year life and requires $99,000 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. The tax rate is 23 percent and the discount rate is 11 percent. Calculate the NPV for both conveyor belt systems. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. 501,424.00 System A System B 584,074.00 Which conveyor belt system should the firm choose? System AO System B

I NEED SYSTEM B NPV ANSWERED ONLY, THIS IS MY 2ND TIME POSTING THIS QUESTION. THE 1ST PERSON ANSWERED IT INCORRECTLY,

Answer 1

Calculation of yearly cash flow

Pre tax Annual operating costs -99000

Depreciation (385000/6). -64166.66667

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Total costs. -163166.6667

Add: tax benefit @ 23%. 37528.33333

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Costs after tax. -125638.3333

Addback: Depreciation 64166.66667

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Annual costs -61471.66667

Cash flow at Year 0. P.V.F.@11%. Present value

Initial investment -385000. 1. -385000

Cashflow at Year 1 -61471.67 0.9009. -55379.88

Cashflow at Year 2 -61471.67 0.8116. -49891.78

Cashflow at Year 3. -61471.67 0.7312. -44947.55

Cashflow at Year 4. -61471.67 0.6587. -40493.29

Cashflow at Year 5 -61471.67 0.5935. -36480.44

Cashflow at Year 6 -61471.67 0.5346. -32865.26

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NPV. -645058.2128

So, NPV of project B is -645058.21

Note: Depreciation is deducted only for tax calculation. it does not generate Cash outflow. so it will be added back.

P.V.F. formula = 1/(1+Discount rate)^year

for year 1, 1/(1+11%)^1 = 0.9009009009

for year 2, 1/(1+11%)^2 = 0.8116224332