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