Reference no: EM13731543
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $240,000, has a four-year life, and requires $75,000 in pre tax annual operating costs. System B costs $340,000, has a six-year life, and requires $69,000 in pre tax 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 8 percent, which project should the firm choose?
Here is what I have. Is it right? How do I get the NPV, show work so I can try to understand this well?
OFC = after-tax operating costs + depreciation
System A OFC = $75,000 * .66 + 60,000 * .34 = $49,500 + 20,400= -$66,900
System B OFC= $69,000 * 66 + 56,667 * .34 = $45,540 + 19,267 = -$64,807
Annuity factor = [1- (1/(1+r)^n)] /r
System A = [1-(1/ (1+.09)^4)]/.09
[1-(1/1.4115)]/.09
(1-0.7084)/ .09
Annuity= 3.24
System B = [1-(1/ (1+.09)^6)]/.09
[1-(1/1.6771)]/.09
(1-0.5962)/ .09
Annuity = 4.48
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: Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $240,000, has a four-year life, and requires $75,000 in pre tax annual operating costs. System B costs $340,000, has a six-year lif..
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