Corporate Finance
Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 6, Problem 15QAP
Summary Introduction

To calculate: NPV and EAC of both systems to choose the better conveyor belt.

Introduction: The term Net present value refers to the method of making a capital budgeting decision where it represents the present value of benefits that can be compared with the initial investment so that the investment decision of the project can be evaluated.

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Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $320,000, has a 4-year life, and requires $117,000 in pretax annual operating costs. System B costs $400,000, has a 6-year life, and requires $111,000 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 21 percent and the discount rate is 10 percent.   Calculate the EAC for both conveyor belt systems.    Which conveyor belt system should the firm choose?   System B System A
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $268,000, has a four-year life, and requires $82,000 in pretax annual operating costs. System B costs $378,000, has a six-year life, and requires $76,000 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 project is chosen, it will not be replaced when it wears out. The tax rate is 35 percent and the discount rate is 10 percent. Calculate the NPV for both conveyor belt systems. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems. System A costs $427,000, has a 6-year life, and requires $115,000 in pretax annual operating costs. System B costs $502,000, has an 8-year life, and requires $79,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 33 percent and the discount rate is 24 percent. Which system should the firm choose and why?  a. System B because its net present value is -$612,240 b. No option is correct c. System A because its net present value is $211,516 d. System A because its net present value is -$588,792

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Corporate Finance

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