Lang Industrial Systems Company (LISC) is trying to decide between two different

Question

Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $204,000, has a four-year life, and requires $66,000 in pretax annual operating costs. System B costs $288,000, has a six-year life, and requires $60,000 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 35 percent and the discount rate is 10 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.) Which conveyor belt system should the firm choose? System A System B

Explanation / Answer

System A should be selected as present value of total cash outflows is less as compared to System B.

A Year Cash OutflowsFlows PVF@ 10 % PV 0 204000 1 204000 1 42900 0.909 39000 2 42900 0.826 35455 3 42900 0.751 32231 NPV 310686 B Year Cash OutflowsFlows PVF@ 10 % PV 0 288000 1 288000 1 39000 0.909 35455 2 39000 0.826 32231 3 39000 0.751 29301 NPV 384987

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