Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $315,000, has a 4-year life, and requires $113,000 in pretax annual operating costs. System B costs $395,000, has a 6-year life, and requires $107,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 25 percent and the discount rate is 9 percent. Calculate the EAC 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.)
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Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $315,000, has a 4-year life, and requires $113,000 in pretax annual operating costs. System B costs $395,000, has a 6-year life, and requires $107,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 25 percent and the discount rate is 9 percent. |
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Calculate the EAC 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.) |
Net present value (NPV) is a measure of the value of an investment or a project, considering the time value of money. It is used to determine whether an investment is expected to generate a positive return or a negative return over a given period.
NPV is calculated by subtracting the present value of the cash outflows from the present value of the cash inflows. The present value of the cash inflows and outflows is calculated by discounting each cash flow back to its present value, considering a discount rate that reflects the opportunity cost of investing the money.
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