Lang Industrial Systems Company (LISC) is trying to decide between two different
ID: 2778289 • Letter: L
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.
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.
Explanation / Answer
Added a revised version with change is tax shield calculation;
Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Project A Discount rate @10% 1 0.909 0.826 0.751 0.683 0.621 0.564 Investment (204,000) (204,000) PV of Investments (330,668) Depreciation 51,000 51,000 51,000 51,000 51,000 51,000 Annual Operating Cost (66,000) (66,000) (66,000) (66,000) (66,000) (66,000) Tax shield on depreciation @35% 17,850 17,850 17,850 17,850 17,850 17,850 Net Opearating Cost (48,150) (48,150) (48,150) (48,150) (48,150) (48,150) PV of net opearting cost (209,706) (43,773) (39,793) (36,176) (32,887) (29,897) (27,179) NPV of costs (540,374) (after 4 years the same amount invested for the equipment for continuity ) Project B Investment PV of Investments (288,000) Depreciation 48,000 48,000 48,000 48,000 48,000 48,000 Annual Operating Cost (60,000) (60,000) (60,000) (60,000) (60,000) (60,000) Tax shield on depreciation @35% 16,800 16,800 16,800 16,800 16,800 16,800 Net Opearating Cost (43,200) (43,200) (43,200) (43,200) (43,200) (43,200) PV of net opearting cost (188,147) (39,273) (35,702) (32,457) (29,506) (26,824) (24,385) NPV of costs (476,147)Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.