Question

Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $232,000, has a four-year life, and requires $73,000 in pretax annual operating costs. System B costs $330,000, has a six-year life, and requires $67,000 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 34 percent and the discount rate is 8 percent.

Calculate the NPV for both conveyor belt systems

NPV
System A	$
System B	$

Which conveyor belt system should the firm choose?

System B System A

Answer 1

Calculation Of Post Tax Operating Cost
		System A	System A
a	Pretax Operating Cost	73000	67000
b	Add: Depreciation	58000	55000
c	Subtotal	131000	122000
d	Less: Saving In Tax	44540	41480
	(c*34%)
e	Less: Depreciation	58000	55000
f	Operating Cost	28460	25520
	(post tax)
Calculation Of NPV
Year	Particular	Discount Factor	System A		System B
		@8%	Cash Flow	Discounted Cash Flow	Cash Flow	Discounted Cash Flow
a	b	c	d	e=d*c	f	g=f*c
0	Initial Cash Flow	1	232000	232000	330000	330000
1	Annual Operating Cost	0.926	28460	26352	25520	23630
2	Annual Operating Cost	0.857	28460	24400	25520	21879
3	Annual Operating Cost	0.794	28460	22592	25520	20259
4	Annual Operating Cost	0.735	28460	20919	25520	18758
5	Annual Operating Cost	0.681			25520	17368
6	Annual Operating Cost	0.630			25520	16082
	NPV			326263		447976
Since NPV of System A is less than system B , the company should choose system A.
Note : Since it is not given in the question , answer is rounded off at nearest dollar without rounding off intermediate calculation.
	Due to this there may be minor difference in answer.