Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A

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)

Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...