Finance Dangerfield Industrial Systems Company (DISC) is trying to decide betwee

Question

Finance

Dangerfield Industrial Systems Company (DISC) is trying to decide between two different conveyor belt systems. System A costs $430,000, has a four-year life, and requires $110,000 in pretax annual operating costs. System B costs $570,000, has a six-year life, and requires $98,000 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. If the tax rate is 34 percent and the discount rate is 11 percent, the NPV for project A is ________ and the NPV for project B is _________ . Therefore, the firm should choose project (A/B?)

Explanation / Answer

System A - Investment 430,000, Annual cost 110,000 x 66% = 72,600 after tax less 34% of annual S/L depreciation, or 36,550, = 36,050 net after tax cost. PV Annuity, N 4, R 11% = 111,843. Total PV 541,843

System B - Investment 570,000, Annual cost 98,000 x 66% = 64,680 after tax less 34% of annual S/L depreciation, or 32,300 = 32,380 net after tax cost. PV Annuity, N 6, R 11% = 136,985 Total PV 706,985

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