Question 1 (of S5 Score This Question 1. 10100 points Lang Industrial Systems Co
ID: 2794584 • Letter: Q
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Question 1 (of S5 Score This Question 1. 10100 points Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $212,000, has a four-year life, and requires $68,000 in pretax annual operating costs System B costs $300,000, has a six-year life, and requires $62,000 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 30 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. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV System A System B Which conveyor belt system should the firm choose? System B O System AExplanation / Answer
LANG INDUSTRIAL SYSTEM System A System B Cost $ 212,000.00 $ 300,000.00 Useful life 4 6 Depreciation $ 53,000.00 $ 50,000.00 Operating Cost $ 68,000.00 $ 62,000.00 Dscount Rate 9% Tax Rate 30% Operating Cash Flow formula=Operating cost(1-Tax rate)+Depreciaton*Tax rate Operating Cash Flow of System A (-$68000*70%+$53000*30%) $ (31,700.00) Operating Cash Flow of System B (-$62000*70%+$50000*30%) $ (28,400.00) NPV of System A (-$212000-($31700(PV Factor 9% for 4 Years)) (-212000-($31700*3.240) $ (314,708.00) NPV of System B (-$300000-($28400(PV Factor 9% for 6 Years)) (-300000-($28400*4.486) $ (427,402.40) Firm should choose Coneyor belt system A because NPV is lower in case of system A
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