Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $265,000, has a four-year life, and requires $73,000 in pretax annual operating costs. System B costs $345,000, has a six-year life, and requires $67,000 in pretax annual operating costs. 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 8 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.)

Question

Business

Tommy

29 October, 17:37

Letang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $265,000, has a four-year life, and requires $73,000 in pretax annual operating costs. System B costs $345,000, has a six-year life, and requires $67,000 in pretax annual operating costs. 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 8 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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Answers (1)

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Ronan Osborne · Answer 1

System A EAC = - $137,679.01

System B EAC = - $127,558.81

Explanation:

Denote i = discount rate = 8%; n = number of compounding period

For system A, the after tax cost of operation is 73,000 x (1-21%) = 57,670

- NPV of system A = - 265,000 - [ 57,670/8%] / [ 1 - (1+8%) ^-4] = - $456,010.3549

- EAC = (NPV x i) / [ 1 - (1+i) ^-n) = (-456,010.3549 x 8%) / (1 - 1.08^-4) = - $137,679.01

For system B, the after tax cost of operation is 67,000 x (1-21%) = 52,930

- NPV of system B = - 345,000 - [ 52,930/8%] / [ 1 - (1+8%) ^-6] = - $589,689.0206

- EAC = (NPV x i) / [ 1 - (1+i) ^-n) = (-589,689.0206 x 8%) / (1 - 1.08^-6) = - $127,558.81