Hagar Industrial Systems Company (HISC) is trying to decide between two differen
ID: 2742066 • Letter: H
Question
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $232,000, has a four-year life, and requires $73,000 in pretax annual operating costs. System B costs $330,000, has a six-year life, and requires $67,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. HISC always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 34 percent and the discount rate is 8 percent.
What is the EAC for each project using aftertax cash flows? (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.)
What is the EAC for each project using aftertax cash flows? (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.)
Explanation / Answer
year
Cash Flow
Operating Cost
After tax operating Exp(73,000 X (1.034)
Depreciation(232000/6)
Tax Savings on Depreciation(58,000*0.34)
Net Cashoutflow
PV Factor @8 %
PV
0
(232,000)
(232,000)
1.0000
(232,000.00)
1
-
(73,000)
(48,180)
58,000
19,720
(28,460)
0.9259
(26,351.85)
2
-
(73,000)
(48,180)
58,000
19,720
(28,460)
0.8573
(24,399.86)
3
-
(73,000)
(48,180)
58,000
19,720
(28,460)
0.7938
(22,592.47)
4
-
(73,000)
(48,180)
58,000
19,720
(28,460)
0.7350
(20,918.95)
NPV
(326,263.13)
EAC
-98,506
EAC=r(NPV)/1-(1+r)-n
=0.08(-326,263.13)/1-(1+0.08)-4
=0.08(-326,263.13)/1-(1.08)-4
=0.08 (-326,263.13)/1-0.735029853
=0.08(-326,263.13)/ 0.264970147
= -26,101.05/0.264970147
= -98,506
System B
year
Cash Flow
Operating Cost
After tax operating Exp(67,000 X (1.034)
Depreciation(330,000/6)
Tax Savings on Depreciation(55,000*0.34)
Net Cashoutflow
PV Factor @8 %
PV
0
(330,000)
(330,000)
1.0000
(330,000.00)
1
-
(67,000)
(44,220)
55,000
18,700
(25,520)
0.9259
(23,629.63)
2
-
(67,000)
(44,220)
55,000
18,700
(25,520)
0.8573
(21,879.29)
3
-
(67,000)
(44,220)
55,000
18,700
(25,520)
0.7938
(20,258.60)
4
-
(67,000)
(44,220)
55,000
18,700
(25,520)
0.7350
(18,757.96)
5
-
(67,000)
(44,220)
55,000
18,700
(25,520)
0.6806
(17,368.48)
6
-
(67,000)
(44,220)
55,000
18,700
(25,520)
0.6302
(16,081.93)
NPV
(447,975.89)
EAC
-96,904
EAC=r(NPV)/1-(1+r)-n
=0.08(-447,975.89)/1-(1+0.08)-6
=0.08(-447,975.89)/1-(1.08)-6
=0.08 (-447,975.89)/1- 0.630169627
=0.08(-447,975.89)/ 0.369830373
= -35838.0712/0.369830373
= -96,904
What is EAC for each project using after cash flows ?
EAC
System A
$ (98,506.00)
System B
$ (96,903.00)
Which conveyor belt system should the firm choose?
System B as it is cheaper than System A.
year
Cash Flow
Operating Cost
After tax operating Exp(73,000 X (1.034)
Depreciation(232000/6)
Tax Savings on Depreciation(58,000*0.34)
Net Cashoutflow
PV Factor @8 %
PV
0
(232,000)
(232,000)
1.0000
(232,000.00)
1
-
(73,000)
(48,180)
58,000
19,720
(28,460)
0.9259
(26,351.85)
2
-
(73,000)
(48,180)
58,000
19,720
(28,460)
0.8573
(24,399.86)
3
-
(73,000)
(48,180)
58,000
19,720
(28,460)
0.7938
(22,592.47)
4
-
(73,000)
(48,180)
58,000
19,720
(28,460)
0.7350
(20,918.95)
NPV
(326,263.13)
EAC
-98,506
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