ceverman
Jul 24, 2014, 09:36 AM
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $290,000, has a four-year life, and requires $85,000 in pretax annual operating costs. System B costs $405,000, has a six-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 system is chosen, it will not be replaced when it wears out. The tax rate is 34 percent and the discount rate is 11 percent.
Calculate the NPV for both conveyor belt systems.
Here are my calculations (though you can't see the formula)
Present value of the cost of the machine
Particulars
System A
System B
Cost of System
290000
405000
Pretax Annual OC
85000
75000
Salvage Value
0
0
Tax Rate
34%
34%
Discount rate
11%
11%
Life of system
4 years
6 years
System A
System B
Depreciation
72500
67500
Tax shield
24650
22950
System A
Net cash flow System
Year 0
Year 1- 4
Initial out flow
290000
0
Operating Cost
0
85000
(-) tax shield on OC
0
-28900
(-) tax shield on depreciation
0
-24650
(-) salvage value
0
0
Net Cash flow (out flow)
290000
31450
Present Value of System A
System B
Net cash flow System
Year 0
Year 1- 4
Initial out flow
405000
0
Operating Cost
0
75000
(-) tax shield on OC
0
-25500
(-) tax shield on depreciation
0
-22950
(-) salvage value
0
0
Net Cash flow (out flow)
405000
26550
Present Value of System A
290000
28333.33333
25525.52553
22995.96894
20717.08914
$ 387,571.92
Present Value of System B
405000
23918.91892
21548.5756
19413.13117
17489.30736
15756.13276
14194.7142
$ 517,320.78
Calculation of EAC
$ 124,926.48
Calculation of EAC
$ 122,283.60
Calculate the NPV for both conveyor belt systems.
Here are my calculations (though you can't see the formula)
Present value of the cost of the machine
Particulars
System A
System B
Cost of System
290000
405000
Pretax Annual OC
85000
75000
Salvage Value
0
0
Tax Rate
34%
34%
Discount rate
11%
11%
Life of system
4 years
6 years
System A
System B
Depreciation
72500
67500
Tax shield
24650
22950
System A
Net cash flow System
Year 0
Year 1- 4
Initial out flow
290000
0
Operating Cost
0
85000
(-) tax shield on OC
0
-28900
(-) tax shield on depreciation
0
-24650
(-) salvage value
0
0
Net Cash flow (out flow)
290000
31450
Present Value of System A
System B
Net cash flow System
Year 0
Year 1- 4
Initial out flow
405000
0
Operating Cost
0
75000
(-) tax shield on OC
0
-25500
(-) tax shield on depreciation
0
-22950
(-) salvage value
0
0
Net Cash flow (out flow)
405000
26550
Present Value of System A
290000
28333.33333
25525.52553
22995.96894
20717.08914
$ 387,571.92
Present Value of System B
405000
23918.91892
21548.5756
19413.13117
17489.30736
15756.13276
14194.7142
$ 517,320.78
Calculation of EAC
$ 124,926.48
Calculation of EAC
$ 122,283.60