BOE Manufacturing is trying to decide between two different conveyor belt system

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.

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.

Explanation / Answer

System B is better Statemnet showing Cash flows System A System B Particulars Time PVf@8% Amount PV Amount PV Cash Outflows                            -                  1.00            (252,000.00)              (252,000.00)          (354,000.00)                (354,000.00) Cash Outflows                       1.00            0.9259              (30,060.00)                (27,833.33)             (27,460.00)                   (25,425.93) Cash Outflows                       2.00            0.8573              (30,060.00)                (25,771.60)             (27,460.00)                   (23,542.52) Cash Outflows                       3.00            0.7938              (30,060.00)                (23,862.60)             (27,460.00)                   (21,798.63) Cash Outflows                       4.00            0.7350              (30,060.00)                (22,095.00)             (27,460.00)                   (20,183.92) Cash Outflows                       5.00            0.6806             (27,460.00)                   (18,688.81) Cash Outflows                       6.00            0.6302             (27,460.00)                   (17,304.46) PV of Cash Outflows              (351,562.53)                (480,944.28) PVF                         3.3121                           4.6229 Equivalent Annual Cost              (106,144.90)                (104,035.19) Particulars System A System B Cost        252,000.00 354,000.00 Life in years                     4.00                6.00 Depreciation per year          63,000.00      59,000.00 Tax Savings on dep @34%          21,420.00      20,060.00 Pretax Operating Costs          78,000.00      72,000.00 Post tax Operating Costs          51,480.00      47,520.00 Net costs          30,060.00      27,460.00

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