BOE Manufacturing is trying to decide between two different conveyor belt system
ID: 2773257 • 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? System A System BExplanation / Answer
Answer:
Equivalent Annual NPV=NPV/Cumulative sum of years of benefit
System A=$379621.4/3.23972=$117177.23
System B=$522726.7/4.4859=$116526.605
System B should be chosen because it has lower PV of cash outflow.
System A Particulars Years P.V.F (9%) Amount ($) PV ($) System cost 0 1 280000 280000 Annual cost 1-4 3.23972 30750 99621.39 Total PV 379621.4 System A Particulars Amount($) Pretax operating cost 85000 Less: Tax @35% 29750 Operating cost after tax 55250 Less: Tax saving on dep [(280000/4)*0.35] 24500 Annual cost after tax 30750Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.