Fundamental of corporate finane Eads Industrial Systems Company (EISC) is trying
ID: 2725828 • Letter: F
Question
Fundamental of corporate finane
Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems. System A costs $538,000, has a 4-year life, and requires $133,000 in pretax annual operating costs. System B costs $630,000, has a five-year life, and requires $102,000 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 34 percent and the discount rate is 16 percent. Which system should the firm choose and why?
A.
A; The net present value is -$898,516.
B.
A; The net present value is -$655,664.
C.
A; The net present value is -$314,216.
D.
B; The net present value is $308,222.
E.
B: The net present value is -$990,696.
A.
A; The net present value is -$898,516.
B.
A; The net present value is -$655,664.
C.
A; The net present value is -$314,216.
D.
B; The net present value is $308,222.
E.
B: The net present value is -$990,696.
Explanation / Answer
System B
Year Annual cash outflow Dep Total cash outflow' Tax saving Total PV FACTOR AT 16% Present values of cash flow 0 (538,000) (538,000) 1 (133,000) (134,500) (267,500) 90,950 (176,550) 0.8621 (152,204) 2 (133,000) (134,500) (267,500) 90,950 (176,550) 0.7432 (131,212) 3 (133,000) (134,500) (267,500) 90,950 (176,550) 0.6407 (113,116) 4 (133,000) (134,500) (267,500) 90,950 (176,550) 0.5523 (97,509) (1,032,040)Related Questions
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