BOE Manufacturing is trying to decide between two different conveyor belt system
ID: 2744516 • Letter: B
Question
BOE Manufacturing is trying to decide between two different conveyor belt systems. System A costs $252,000, has a four-year life, and requires $78,000 in pretax annual operating costs. System B costs $354,000, has a six-year life, and requires $72,000 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).)
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).)
Explanation / Answer
Computation of NPV for both conveyor belt systems:
2. System A should be chosen, because it has the more positive NPV.
System A System B System A and B costs = a -$252,000 -$354,000 pretax annual operating costs= b -$78,000 -$72,000 Depreciation (A = 252,000 / 4years and B = 354,000 / 6years) =c 63,000 59,000 Cash flows, d = {b(1-tax rate) + c * tax rate} ,here tax rate = 34%
Cash flow (System A) =- 78,000 * 0.66 + 63,000 * 0.34
= -51,480 + 21,420 = -30,060
Cash flow (System B) = -72,000*0.66 + 59,000 * 0.34 = -47,520+20,060 = -27,460 -30,060 -27,460 Present value of annuty factor @ 8% = e 3.312 for 4years 4.623 for 6years Net present value of cash flow, f= d * e -99,558.72 -126,947.58 Net present value of System A and B : a+f -351,58.72 -480,947.58
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.