Question

Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $270,000, has a 4-year life, and requires $77,000 in pretax annual operating costs. System B costs $350,000, has a 6-year life, and requires $71,000 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 21 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

		Present Value(PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=discount rate =`8%=0.08
		N=Year   of Cash Flow
		CASH FLOW ANALYSIS OF SYSTEM A
	N	Year	0	1	2	3	4
	A	Total initial cash flow	-$270,000
	c	Pretax Annual Operating Costs		-$77,000	-$77,000	-$77,000	-$77,000
	d=c*(1-0.21)	After tax Annual Operating Costs		-$60,830	-$60,830	-$60,830	-$60,830
	CF=A+D+E	Net Cash Flow	($270,000)	($60,830)	($60,830)	($60,830)	($60,830)	SUM
	PV=CF/(1.08^N)	Present Value of Net Cash Flow	($270,000)	($56,324)	($52,152)	($48,289)	($44,712)	($471,477)
	Sum of PV	Present Worth	($471,477)
	PMT	Equivalent Annual Cost(EAC)	($142,348.62)	(Using PMT function of excel with Rate=8%, Nper=4, Pv=-471477)
		CASH FLOW ANALYSIS OF SYSTEM B
	N	Year	0	1	2	3	4	5	6
	A	Total initial cash flow	-$350,000
	c	Pretax Annual Operating Costs		-$71,000	-$71,000	-$71,000	-$71,000	-$71,000	-$71,000
	d=c*(1-0.21)	After tax Annual Operating Costs		-$56,090	-$56,090	-$56,090	-$56,090	-$56,090	-$56,090
	CF=A+D+E	Net Cash Flow	($350,000)	($56,090)	($56,090)	($56,090)	($56,090)	($56,090)	($56,090)	SUM
	PV=CF/(1.08^N)	Present Value of Net Cash Flow	($350,000)	($51,935)	($48,088)	($44,526)	($41,228)	($38,174)	($35,346)	($609,297)
	Sum of PV	Present Worth	($609,297)
	PMT	Equivalent Annual Cost(EAC)	($131,800.39)	(Using PMT function of excel with Rate=8%, Nper=6, Pv=-609297)