Question

Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $275,000, has a 4-year life, and requires $81,000 in pretax annual operating costs. System B costs $355,000, has a 6-year life, and requires $75,000 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 22 percent and the discount rate is 9 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.)

Answer 1

Answer:

System A = $535,733

System B = $593,130

Explanation:

The NPV for Hagar Industrial Systems Company (HISC) is as follows,

For system A:

Annual depreciation = $275,000 / 4 years = $68,750

Pretax annual operating cost = $81,000

Present value of total cost = - $275,000 - [$81,000 * (1 - 22%) + $68,750 * 22%] * PVIFA 9% 4 years.

Present value of total cost = - $275,000 -  ($63,180 + $15,125) * 3.329720

Present value of system A = - $275,000 - $260,733

Present value of system A = - $535,733

For system B:

Annual depreciation = $355,000 / 6 years = $59,166

Pretax annual operating cost = $75,000

Present value of total cost = - $355,000 - [$75,000 * (1 - 22%) + $59,166 * 22%] * PVIFA 9% 4 years.

Present value of total cost = - $355,000 -  ($58,500 + $13,016) * 3.329720

Present value of system B = - $355,000 - $238,130

Present value of system B = - $593,130