The NPV of both the systems and the system to be preferred. Net Present Value (NPV): NPV is the technique of capital budgeting. To select the project or not to select the project is based on the NPV of the project. If the project has positive NPV then, if the NPV is negative then reject the project.

Question

Want to see the full answer?

Answer 1

Question

Chapter 6, Problem 12QP

Summary Introduction

To identify: The NPV of both the systems and the system to be preferred.

Net Present Value (NPV):

NPV is the technique of capital budgeting. To select the project or not to select the project is based on the NPV of the project. If the project has positive NPV then, if the NPV is negative then reject the project.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

A company is trying to decide between two different conveyor belt systems. System A costs $300,000, has a 4-year life, and requires $101,000 in pretax annual operating costs. System B costs $380,000, has a 6-year life, and requires $95,000 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 22 percent and the discount rate is 10 percent. A. Calculate the NPV for both conveyor belt systems. (Do not round intermediate calculations ) B. Which conveyor belt system should the firm choose? Please use excel and show equations used.

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

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.)