Hagar Industrial Systems Company (HISC) is trying to decide between two differen
ID: 2775531 • Letter: H
Question
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $268,000, has a four-year life, and requires $82,000 in pretax annual operating costs. System B costs $378,000, has a six-year life, and requires $76,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. HISC always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 35 percent and the discount rate is 10 percent.
What is the EAC for each project?
System A=
System B=
can you give me some detail for the answer? thanks!
What is the EAC for each project?
System A=
System B=
can you give me some detail for the answer? thanks!
Explanation / Answer
System A Time line 0 1 2 3 4 Cost of equipment -268000 =Initial Investment outlay -268000 Pretax operating cost -82000 -82000 -82000 -82000 -Depreciation =cost of equipment/no. of years -67000 -67000 -67000 -67000 = -149000 -149000 -149000 -149000 -taxes =(Operating cost+ depreciation)*(1-tax) -96850 -96850 -96850 -96850 +Depreciation 67000 67000 67000 67000 =after tax operating cash flow -29850 -29850 -29850 -29850 Total Cash flow out flow for the period -268000 -29850 -29850 -29850 -29850 Discount factor =(1+discount rate)^n 1 1.1 1.21 1.331 1.4641 Discount rate= 10% Discounted cash flows -268000 -27136.4 -24669.4 -22426.7 -20388 NPV= Sum of discounted cash flows -362620 EAC = equivalent annuity which gives the same NPV Discount factor =(1+discount rate)^n 1 1.1 1.21 1.331 1.4641 Discount rate= 10% EAC -86962 -86962 -86962 -86962 -86962 Discounted cash flows -86962 -79056.4 -71869.5 -65335.9 -59396.2 NPV= -362620.4836 -362620 EAC = -86962.03862 System B Time line 0 1 2 3 4 5 6 Cost of equipment -378000 =Initial Investment outlay -378000 Pretax operating cost -76000 -76000 -76000 -76000 -76000 -76000 -Depreciation =cost of equipment/no. of years -63000 -63000 -63000 -63000 -63000 -63000 = -139000 -139000 -139000 -139000 -139000 -139000 -taxes =(Operating cost+ depreciation)*(1-tax) -90350 -90350 -90350 -90350 -90350 -90350 +Depreciation 63000 63000 63000 63000 63000 63000 =after tax operating cash flow -27350 -27350 -27350 -27350 -27350 -27350 Total Cash flow out flow for the period -378000 -27350 -27350 -27350 -27350 -27350 -27350 Discount factor =(1+discount rate)^n 1 1.1 1.21 1.331 1.4641 1.61051 1.771561 Discount rate= 10% Discounted cash flows -378000 -24863.6 -22603.3 -20548.5 -18680.4 -16982.2 -15438.4 NPV= Sum of discounted cash flows -497116 EAC = equivalent annuity which gives the same NPV Discount factor =(1+discount rate)^n 1 1.1 1.21 1.331 1.4641 1.61051 1.771561 Discount rate= 10% EAC -119216 -119216 -119216 -119216 -119216 -119216 -119216 Discounted cash flows -119216 -108378 -98525.9 -89569 -81426.3 -74024 -67294.5 NPV= -497116.3801 -497116 EAC = -119216.3168
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