Lang Industrial Systems Company (LISC) is trying to decide between two different
ID: 2760388 • Letter: L
Question
Lang Industrial Systems Company (LISC) 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. Whichever project is chosen, it will not be replaced when it wears out. The tax rate is 30 percent and the discount rate is 9 percent.
Calculate the NPV for both conveyor belt systems
Lang Industrial Systems Company (LISC) 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. Whichever project is chosen, it will not be replaced when it wears out. The tax rate is 30 percent and the discount rate is 9 percent.
Explanation / Answer
NPV of system A is better than System B
Year System A System B PV ractor (1/(1+r)^n) at 9%% Present Value of System A Present Value of System B 0 -200000 -282000 1.000 -200000.00 -282000.00 1 45500 41300 0.917 41743.12 37889.91 2 45500 41300 0.842 38296.44 34761.38 3 45500 41300 0.772 35134.35 31891.18 4 45500 41300 0.708 32233.35 29257.96 5 0 41300 0.650 0.00 26842.17 6 0 41300 0.596 0.00 24625.84 NPV -52592.75 -96731.56Related Questions
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