Question

1. Pags Industrial Systems Company (PISC) is trying to decide between two different conveyor belt systems. System A costs $405,000, has a three-year life, and requires $105,000 in pretax annual operating costs. System B costs $450,000, has a five-year life, and requires $60,000 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 the tax rate is 34% and the discount rate is 20%, which project should the firm choose?

Answer 1

Based on the given data, pls find below steps, workings and answers:

Since the lives of both these systems are different, we need to compute Equivalent Annual Cost as well as NPV for analysing the feasibility;

Based on the below workings, the EAC of System B is lower that that of the System A and hence System B should be chosen over System A;