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

NPV   System A $   System B $

Explanation / Answer

Calculation of NPV:

Cumulative DF for 4 Years at 9%: 3.240

Present Value of Annual Operating Cost for 4 Years: 34,100 x 3.240 = $110,484

NPV = 236,000 + 110,484 = $346,484

Cumulative DF for 6 Years at 9%: 4.486

Present Value of Annual Operating Cost for 6 Years: 30,800 x 4.486= $138,169

NPV = 336,000 + 138,169 = $474,169

Amount($) System A: Cost 236,000 Pretax Annual Operating Cost 74,000 + Depreciation 59,000 Total Expenses 133,000 - Tax(30%) 39,900 After Tax Operating Cost 93,100 - Depreciation 59,000 Net Operating Cost Per Year 34,100

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