Eads Industrial Systems Company (EISC) is trying to decide between two different

Question

Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems. System A costs $427,000, has a 6-year life, and requires $112,000 in pretax annual operating costs. System B costs $517,000, has an 8-year life, and requires $79,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 33 percent and the discount rate is 24 percent. Which system should the firm choose and why?

Please use the process of net present value to determine answer.

Explanation / Answer

NPV of System A = -427000 - (112000 -183166.67*0.33)PVIFA(24%,6)

=-(427000+155,720)

=-$582,720

NPV of System B =- 517000-(79000 -143625*0.33)PVIFA(24%,8)

=-517000-108123

=-$625,123

Hence System A is to be choosen as per net present value method where NPV of system A is less cost

Choose A

B. A; The net present value is -$582,720.

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