BOE Manufacturing is trying to decide between two different conveyor belt system
ID: 2773203 • Letter: B
Question
BOE Manufacturing is trying to decide between two different conveyor belt systems. System A costs $280,000, has a four-year life, and requires $85,000 in pretax annual operating costs. System B costs $396,000, has a six-year life, and requires $79,000 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 35 percent and the discount rate is 9 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).) Which conveyor belt system should the firm choose?Explanation / Answer
computation of Net present value
System PBDT depreciation PBT Tax PAT depreciation cash profit discount PV cash flows
@ 9% A 280000 70000 210000 35% 136500 70000 206500 0.9174 189443
B 396000 66000 330000 35% 214500 66000 280500 0.9174 257330
particulars A B
cash inflows 189443 257330
initial investment (280000) (396000)
NPV -90557 -138670
both systems have NPV contains negative values. sytem A have contains low risk.
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