We have to calculate the EAC for both the conveyor belt system.
Solutions :
<u>Equivalent Annual Cost or (EAC) for the SYSTEM-A</u>
tax rate )
![$=-855,000(1-0.23)+\left[\left(\frac{280,000}{4}\right)\times 0.23\right]$](https://tex.z-dn.net/?f=%24%3D-855%2C000%281-0.23%29%2B%5Cleft%5B%5Cleft%28%5Cfrac%7B280%2C000%7D%7B4%7D%5Cright%29%5Ctimes%200.23%5Cright%5D%24)
= $ 49,350
Year Annual Cost flow Present value factor Present Value of Annual
at 10% cash flow
1 -49,350 0.909091 -44,863.64
2 -49,350 0.826446 -40,785.12
3 -49,350 0.751315 -37,077.39
4 -49,350 <u> 0.683013 </u> <u>-33,706.71 </u>
Total $ 3.169865 $ -156,432.86
Therefore, Net Present value = present value of the annual cash flow - initial investment.
= 156,432.86 - 280,000
= $ 436,432.86 (negative)
Now the EAC or the Equivalent Annual Cost for System A :
dollar (negative)
tax rate)
![$=79,000(1-0.23)+\left[\left(\frac{360,000}{6}\right) \times 0.23\right]$](https://tex.z-dn.net/?f=%24%3D79%2C000%281-0.23%29%2B%5Cleft%5B%5Cleft%28%5Cfrac%7B360%2C000%7D%7B6%7D%5Cright%29%20%5Ctimes%200.23%5Cright%5D%24)
= -$ 47,030
Year Annual Cost flow Present value factor Present Value of Annual
at 10% cash flow
1 -47,030 0.909091 -42,754.55
2 -47,030 0.826446 -38,867.77
3 -47,030 0.751315 -35,334.34
4 -47,030 0.683013 -32,122.12
5 -47,030 0.620921 -29,201.93
6 -47,030 <u> 0.564474 </u> <u> -26,547.21 </u>
Total $ 4.355261 $ -204,827.91
Net Present Value = Present Value of annual cash inflows – Initial Investment
= -$ 564,827.91 (negative)
EAC for system B:
Equivalent Annual Cost for system B 
= -$129,688.66 (negative)
