Letang Industrial Systems Company (LISC) is trying to decide between two differe
ID: 2808504 • Letter: L
Question
Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $265,000, has a four-year life, and requires $73,000 in pretax annual operating costs. System B costs $345,000, has a six-year life, and requires $67,000 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 21 percent and the discount rate is 8 percent.
Calculate the NPV for both conveyor belt systems. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $265,000, has a four-year life, and requires $73,000 in pretax annual operating costs. System B costs $345,000, has a six-year life, and requires $67,000 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 21 percent and the discount rate is 8 percent.
Calculate the NPV for both conveyor belt systems. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
System A System BExplanation / Answer
OCF(a) = [-Pretax annual operating costs (1-Tax rate) + Tax Rate (system a cost/useful life)]
OCF(a) = [-73,000 (1 - 0.21) + 0.21 (265,000/4 years)]
OCF(a) = - 57,670 + 13,912.50
OCF(a) = - $43,757.50
NPV(a) = System A cost – OCF(a) (PVIFA)
NPV(a) = - 265,000 – 43,757.50 (3.31213)
NPV(a) = - 265,000 - 144,930.5285
NPV(a) = - $409,930.53
OCF(b) = [-Pretax annual operating costs (1-Tax rate) + Tax Rate (system a cost/useful life)]
OCF(b) = [-67,000 (1 - 0.21) + 0.21 (345,000/6 years)]
OCF(b) = - 52,930 + 12,075
OCF(b) = - $40,855
NPV(b) = System A cost – OCF(a) (PVIFA)
NPV(b) = - 345,000 – 40,855 (4.62288)
NPV(b) = - 265,000 - 188,867.7624
NPV(b) = - $453,867.76
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