Lang
Industrial systems company (LISC) is trying to decide between two different
conveyor belt...

Question

Lang
Industrial systems company (LISC) is trying to decide between two different
conveyor belt systems. System A costs $240,000, has a four-year life, and
requires $75,000 in pretax annual operating costs. System B costs $340,000, has
a six-year life, and requires $69,000 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. If tax rate 34% and the discount rate is 8%, which project
should the firm choose?

Robert · Accepted Answer

OCF System A  = 49,500 + 20,400 
   = 69,900 
OCF System B  = 45,540 + 19,267 
   = 64,807 
 
Annuity Factor System A = [1 – (1 / (1-r)n)] / r 
    = [1 – (1 / (1-0.09)4)] / 0.09 
    = 3.24 
Annuity Factor System B = [1 – (1 / (1-r)n)] / r 
    = [1 – (1 / (1-0.09)6)] / 0.09 
    = 4.

Lang Industrial systems company (LISC) is trying to decide between two different conveyor belt systems. System A costs $240,000, has a four-year life, and requires $75,000 in pretax annual operating...

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