Question

Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $265,000, has a four-year life, and requires $73,000 in pretax annual operating costs. System B costs $345,000, has a six-year life, and requires $67,000 in pretax annual operating costs. The company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 21 percent and the discount rate is 8 percent. Calculate the EAC for both conveyor belt systems.

Answer 1

System-A					System-B
Pre tax annaul cost			-73000		Pre tax annaul cost			-67000
Less: tax @ 21%			15330		Less: tax @ 21%			14070
Post tax cost			-57670		Post tax cost			-52930
Tax shield on depreciation			13913		Tax shield on depreciation			12075
(265000/4)*0.21					(345000/6)*0.21
Annual cash ourflows			-43757		Annual cash ourflows			-40855
PVF at 8% for 4 years			3.31213		PVF at 8% for 4 years			4.62288
Present value of cost			-144928.9		Present value of cost			-188868
Initial investment			-265000		Initial investment			-345000
Total outflows PV			-409928.9		Total outflows PV			-533868
Divide: Annuity factor			3.31213		Divide: Annuity factor			4.62288
Equivalent annual cost			-123765.9		Equivalent annual cost			-115484