Question

WklyEx08 for Chapter Ten (Part 2) 6 Saved Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $270,000, has a four-year life, and requires $77,000 in pretax annual operating costs. System B costs $350,000, has a six-year life, and requires $71,000 in pretax annual operating costs. Suppose 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. (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.) System A System B

Answer 1

ANSWER:

Particulars	System A	System B
Pre tax annual cost less: tax @ 21%	($77000) $16170	($71000) $14910
Post tax annual cost tax shield on depreciation : System A: ($270000/4) x 21% System B: ($350000/6) x 21%	($60830) . $14175 .	($56090) . . $12250
Annual cash outflows PVAF(i, n): System A: PVAF(8%,4) = 3.31213 System B: PVAF(8%,6) = 4.62288	($46655) . 3.31213 .	($43840) . . 4.62288
Present value of cost initial investment	($154,527.42515) ($270000)	($202,667.0592) ($350000)
PV of total outflows divide: PVAF(i, n)	($424,527.42515) 3.31213	($552,667.0592) 4.62288
Equivalent Annual Costs	($128,173.54)	($119,550.38)