System A costs $305,000, has a 4-year life, and requires $105,000 in pretax annual operating costs....

System A costs $305,000, has a 4-year life, and requires $105,000 in pretax annual operating costs. System B costs $385,000, has a 6-year life, and requires $99,000 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 11 percent.

Calculate the EAC for both conveyor belt systems.

Expert Solution

EAC: System A = 17459.54

System B = 14774.98

(Ignoring depreciation due to lack of information)

	System A				System B
Year	Initial cost	Savings after tax	Net CF	Initial cost	Savings after tax	Net CF
0	-305000		-305000	-385000		-385000
1		$80,850.00	80850		$76,230.00	76230
2		$80,850.00	80850		$76,230.00	76230
3		$80,850.00	80850		$76,230.00	76230
4		$80,850.00	80850		$76,230.00	76230
5			0		$76,230.00	76230
6			0		$76,230.00	76230

		NPV	-54167.27		NPV	-62506.10
		EAC	$17,459.54		EAC	$14,774.98

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