Problem 10-20 Comparing Mutually Exclusive Projects [LO1] Lang Industrial System

Question

Problem 10-20 Comparing Mutually Exclusive Projects [LO1] Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $264,000, has a four-year life, and requires $81,000 in pretax annual operating costs. System B costs $372,000, has a six-year life, and requires $75,000 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 34 percent and the discount rate is 8 percent. Calculate the NPV for both conveyor belt systems. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)) NPV System A $ System B $

Explanation / Answer

Calculation of NPV:

Annual Operating Cost:

PV Discount Factor at 8% for 4 Years = 3.31213

PV Discount Factor at 8% for 6 Years = 4.62288

PV of Outflow of System A = 31,020 x 3.31213 = $102,742.273

PV of Outflow of System B = 28,420 x 4.62288 = $131,382.25

NPV of System A = 264,000 + 102,742.273 = $366,742.273

NPV of System B = 372,000 + 131,382.25 = $503,382.25

System A System B Annual Operating Cost 81,000 75,000 Depreciation 66,000 62,000 Total Pretax Cost 147,000 137,000 Tax 49,980 46,580 After Tax Cost 97,020 90,420 - Depreciation 66,000 62,000 Net Cash Flow 31,020 28,420

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