BOE Manufacturing is trying to decide between two different conveyor belt system

Question

BOE Manufacturing is trying to decide between two different conveyor belt systems. System A costs $236,000, has a four-year life, and requires $74,000 in pretax annual operating costs. System B costs $336,000, has a six-year life, and requires $68,000 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.

Calculate the NPV for both conveyor belt systems.

Explanation / Answer

BOE Manufacturing System A System B

Outflow

PV of

System A

1.000

Notes

Particulars

Outflow

PV Factor@9%

PV of

System A

Outflow PV of System B Initial Investment 236000

1.000

236000 336000 336000 Annual Operating Costs Year 1 34100 0.917 31270 30800 28244 Year 2 34100 0.842 28712 30800 25934 Year 3 34100 0.772 26325 30800 23778 Year 4 34100 0.701 23904 30800 21591 Year 5 0.650 30800 20020 Year 6 0.596 30800 18357 Salvage Value ----- ----- Net present value of Costs 346211 473924

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