Question

Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $265,000, has a four-year life, and requires $73,000 in pretax annual operating costs. System B costs $345,000, has a six-year life, and requires $67,000 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 21 percent and the discount rate is 8 percent.

Calculate the NPV for both conveyor belt systems. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) System A System B

Answer 1

System -A
Pre tax -cost			-73000
Less: Tax @ 21%			15330
After tax cost			-57670
Tax shield on dep (265000/4*21%)			13912.5
Net after tax cost			-43757.5
Annuity VF at 8% for 4 years			3.31213
Present value of Outflows			-144930.528
Initial investment			-265000
NPV			-409930.528
System-B
Pre tax -cost			-67000
Less: Tax @ 21%			14070
After tax cost			-52930
Tax shield on dep (345000/6*21%)			12075
Net after tax cost			-40855
Annuity VF at 8% for 6 years			4.62287
Present value of Outflows			-188867.354
Initial investment			-345000
NPV			-533867.354