Hagar Industrial Systems Company (HISC) is trying to decide between two differen
ID: 2724844 • Letter: H
Question
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $200,000, has a four-year life, and requires $65,000 in pretax annual operating costs. System B costs $282,000, has a six-year life, and requires $59,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. HISC always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 30 percent and the discount rate is 9 percent. What is the EAC for each project using aftertax cash flows?
Explanation / Answer
particulars system A system B
1.cost of machine 200000 282000
2.life 4 years 6 years
3. operating expenses 65000 59000
4. depreciation per annum (1/2) 50000 47000
5. total expenses (3+4) 115000 106000
6. tax saving at 30% on(5) 34500 31800
7.PAT per annum(outflow)(5-6) 80500 74200
8.CFAT per annum=(7+4) 130500 121200
9. Anuity factor at 9% 3.239 4.485
10.EAI =(1)/(9) 61747.45 62876.25
11.EAC=(8-10) 68752.55 58323.75
since system B has least EAC , it may be selected.
(p.v of anuity factor =1/n to the power of(1+r) )
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