| | | # Problem getting correct EAC
Asked Jul 24, 2014, 09:36 AM
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| 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 | |
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