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