Question

Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $260,000, has a four-year life, and requires $80,000 in pretax annual operating costs. System B costs $366,000, has a six-year life, and requires $74,000 in pretax annual operating costs. Suppose LISC always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 30 percent and the discount rate is 9 percent.
Calculate the EAC 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))
Steps:
1. Calculate NPV for each belt system
2. Divide the NPV by the annuity factor for 12 years for EAC.
Since lives are unequal for both systems, System A will be replaced every 4 years (replaced twice) System B will be replaced every 6 years (replaced once) so that both can be compared with equal lives (12)
OCF = Annual operating costs after tax - Depreciation tax shelter (assuming annual operating costs does not include depreciation)



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  • CreatedAugust 05, 2013
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