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

A's retun per each year after tax= $74,000 - (30%)22200=$51,800 and the present value at 9% is=

= $51,000 X 3.240= $165,240

B's return= $68,000- (30%)20,400= $47,600

= 47,600X4.486= $213,533

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