6. Lang Industrial Systems Company (LISC) is trying to decide between two differ
ID: 2763003 • Letter: 6
Question
6.
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $208,000, has a four-year life, and requires $67,000 in pretax annual operating costs. System B costs $294,000, has a six-year life, and requires $61,000 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.
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $208,000, has a four-year life, and requires $67,000 in pretax annual operating costs. System B costs $294,000, has a six-year life, and requires $61,000 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.
Explanation / Answer
System A
After tax net income =$67,000*(1-.34)
=$44,220
Depreciation=$208,000/4
$=52,000
Cash flow=$44,220+$52,000
=$96,220
NPV=96,200/(1+.08)+ 96,200/(1+.08)^2+ 96,200/(1+.08)^3+ 96,200/(1+.08)^4-208,000
NPV=89,074.74+82,475.99+76,366.66+70,709.87-208,000
NPV=$110,627.26
System B
After tax net income =$61,000*(1-.34)
=$40,260
Depreciation=$294,000/6
$=49,000
Cash flow=$40,260+$49,000
=$89,260
NPV=89,260/(1+.08)+ 89,260/(1+.08)^2+ 89,260/(1+.08)^3+ 89,260/(1+.08)^4 +89,260/(1+.08)^5+89,260/(1+.08)^6-208,000
NPV=82,648.15+76,526.06+70,857.47+65,608.76+60,748.86+56,248.94-294,000
NPV=$118,638.24
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.