Dangerfield Industrial Systems Company (DISC) is trying to decide between two di
ID: 2775994 • Letter: D
Question
Dangerfield Industrial Systems Company (DISC) is trying to decide between two different conveyor belt systems. System A costs $430,000, has a four-year life, and requires $110,000 in pretax annual operating costs. System B costs $570,000, has a six-year life, and requires $98,000 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. If the tax rate is 34 percent and the discount rate is 11 percent, the NPV for project A is $541,843.17 incorrect and the NPV for project B is $706,984.82 incorrect . Therefore, the firm should choose project B incorrect. (Negative amounts should be indicated by a minus sign. Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
System A
Pretax savings = 110,000
Annual Depreciation = (cost of system-salvage value) / n
= (430,000 – 0)/4
=107,500
OCF = pretax savings x(1- tax rate) + Depreciation x tax rate
= 110,000 x(1-0.34) + 107,500 x0.34
=109,150
NPV = PV of inflows – initial outflow
= 109150 x PVIFA (4,11%) – 430,000
= 109,150 x 3.1042 -430,000
=-91,368.05
System B
Pretax savings = 98,000
Annual Depreciation = (cost of system-salvage value) / n
= (570,000 – 0)/6
=95000
OCF = pretax savings x(1- tax rate) + Depreciation x tax rate
= 98,000 x(1-0.34) + 95,000 x0.34
=96,980
NPV = PV of inflows – initial outflow
= 96,980 x PVIFA (6,11%) – 570,000
= 96,980x 4.2305 -570,000
=-159,722.44
None of the projects should be chosen as both has a negative NPV.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.