Question

Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $330,000, has a 4-year life, and requires $125,000 in pretax annual operating costs. System B costs $410,000, has a 6-year life, and requires $119,000 in pretax annual operating costs. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume the tax rate is 23 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.)

Answer 1

Tax Shield on Dep = Dep * Tax Rate

Post tax Operating COst = OPerating Cost * ( 1- Tax Rate )

Net Cash Out flow for Machine A for Year 1 to Year 4 = Net OP cost - Tax shield on Dep

EAC = PV of Cash Outflow / PVAF

Machine B can be selected