Hagar Industrial Systems Company (HISC) is trying to decide between two differen
ID: 2639293 • Letter: H
Question
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $228,000, has a four-year life, and requires $72,000 in pretax annual operating costs. System B costs $324,000, has a six-year life, and requires $66,000 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 system 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. (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16). Negative amounts should be indicated by a minus sign.)
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $228,000, has a four-year life, and requires $72,000 in pretax annual operating costs. System B costs $324,000, has a six-year life, and requires $66,000 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 system 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
Calculation of After Tax Annual Operating Cost:
NPV = Outflow + Total PV of Operating Cost
NPV Of A = 228,000 + 142,200 = $370,200
NPV Of B = 324,000 + 159,528 = $483,528
So, Firm should Choose System A because it has Lower NPV of Cost.
Annual Dep.:
System A = 228,000 / 4 = $57,000
System B = 324,000 / 6 = 54,000
System A System B Annual Operating Cost 72,000 66,000 Less: Tax Saving on Dep.(35%) 19,950 18,900 Annual Operating Cost After Tax 52,050 47,100 PV at 10% (For 4 and 6 Years) 0.6830 0.5645 PV of Annual Operating Cost 35,550 26,588 Total Annual Operating Cost 142,200 159,528Related Questions
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