Question:
Hagar Industrial Systems Company is trying to decide between two different conveyor belt systems. System A costs $430,000, has a four-year life, and requires $120,000 in pretax annual operating costs. System B costs $540,000, has a six-year life, and requires $80,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage values. Whichever system is chosen, it will not be replaced when it wears out.
If the tax rate is 34% and the discount rate is 20%, which system should the firm choose?