CORPORATE FINANCE--CONNECT ACCESS CARD
CORPORATE FINANCE--CONNECT ACCESS CARD
12th Edition
ISBN: 9781264807475
Author: Ross
Publisher: MCG CUSTOM
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Chapter 6, Problem 15QAP
Summary Introduction

To calculate: NPV and EAC of both systems to choose the better conveyor belt.

Introduction: The term Net present value refers to the method of making a capital budgeting decision where it represents the present value of benefits that can be compared with the initial investment so that the investment decision of the project can be evaluated.

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Rust Industrial Systems is trying to decide between two different conveyor belt systems. System A costs $220,000, has a four-year life, and requires $70,000 in pretax annual operating costs. System B costs $312,000, has a six-year life, and requires $64,000 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 system is chosen, it will not be replaced when it wears out. The tax rate is 25 percent and the discount rate is 8 percent. Calculate the NPV for both conveyor belt systems. Note: 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 is complete but not entirely correct. System A $ 15,579.69 x System B $ 713,268.58 x Which conveyor belt system should the firm choose? System A✔ System B
Rust Industrial Systems is trying to decide between two different conveyor belt systems. System A costs $256,000, has a four-year life, and requires $79,000 in pretax annual operating costs. System B costs $360,000, has a six-year life, and requires $73,000 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 system is chosen, it will not be replaced when it wears out. The tax rate is 24 percent and the discount rate is 10 percent. Calculate the NPV for both conveyor belt systems. Note: 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.   Which conveyor belt system should the firm choose? multiple choice System A System B
Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems. System A costs $427,000, has a 6-year life, and requires $115,000 in pretax annual operating costs. System B costs $502,000, has an 8-year life, and requires $79,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 33 percent and the discount rate is 24 percent. Which system should the firm choose and why?  a. System B because its net present value is -$612,240 b. No option is correct c. System A because its net present value is $211,516 d. System A because its net present value is -$588,792

Chapter 6 Solutions

CORPORATE FINANCE--CONNECT ACCESS CARD

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