Ch. 10, #7 Lang Industrial Systems Company (LISC) is trying to decide between tw
ID: 2738688 • Letter: C
Question
Ch. 10, #7
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $236,000, has a four-year life, and requires $74,000 in pretax annual operating costs. System B costs $336,000, has a six-year life, and requires $68,000 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 30 percent and the discount rate is 9 percent.
Calculate the NPV for both conveyor belt systems. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Calculate the NPV for both conveyor belt systems. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Explanation / Answer
System A Calculation of Annual Cash Outflow Annual Cash Outflow = Operating Cash Outflow - Saving in tax expense due to depreciation =74000 - (236000/4)*30% =74000 - 17700 =56300 Calculation of Present Value of System A Year Cash Flows Present value factor@ Present Value 9.00% 0 -236000 1.000 -236000.00 1 -56300 0.917 -51651.38 2 -56300 0.842 -47386.58 3 -56300 0.772 -43473.93 4 -56300 0.708 -39884.34 NPV -418396.23 System B Calculation of Annual Cash Outflow Annual Cash Outflow = Operating Cash Outflow - Saving in tax expense due to depreciation =68000 - (336000/6)*30% =68000 - 16800 =51200 Calculation of Present Value of System A Year Cash Flows Present value factor@ Present Value 9.00% 0 -336000 1.000 -336000.00 1 -51200 0.917 -46972.48 2 -51200 0.842 -43094.02 3 -51200 0.772 -39535.79 4 -51200 0.708 -36271.37 5 -51200 0.650 -33276.49 6 -51200 0.596 -30528.89 NPV -501873.66