Lang Industrial Systems Company (LISC) is trying to decide between two different
ID: 2705910 • Letter: L
Question
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $252,000, has a four-year life, and requires $78,000 in pretax annual operating costs. System B costs $354,000, has a six-year life, and requires $72,000 in pretax annual operating costs. Suppose LISC always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 34 percent and the discount rate is 8 percent.
Calculate the EAC for both conveyor belt systems.
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $252,000, has a four-year life, and requires $78,000 in pretax annual operating costs. System B costs $354,000, has a six-year life, and requires $72,000 in pretax annual operating costs. Suppose LISC always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 34 percent and the discount rate is 8 percent.
Explanation / Answer
Using the tax shield approach to calculate the OCF, the NPV of system A is: OCFA = -$78,000(1-0.34) + 0.34($252,000/4) OCFA= - $30,060NPVA = - $252,000 - $30,060(PVIFA8%,4) NPVA = - $351,562.53
And the NPV of system B is:
OCFB = -$72,000 (1
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