Suppose in the previous problem that KISC always needs a conveyor belt system; when one wears out,

Question:

Suppose in the previous problem that KISC always needs a conveyor belt system; when one wears out, it must be replaced. Which project should the firm choose now?

Data from previous question

Kingsmill Industrial Systems Company (KISC) is trying to decide between two different conveyor belt systems. System A costs $360,000, has a four-year life, and requires $135,000 in pre-tax annual operating costs. System B costs $430,000, has a six-year life, and requires $98,000 in pre-tax annual operating costs. Both systems are to be depreciated at 30 percent per year (Class 10) and will have no 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 12 percent, which project should the firm choose?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... 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...

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