The Net Present Value for System B, (392,008.04) shows as incorrect when I "check my work" in connect. I am hoping someone can calculate this, and help get the correct NPV for System B?
Here is the Question:
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $212,000, has a four-year life, and requires $68,000 in pretax annual operating costs. System B costs $300,000, has a six-year life, and requires $62,000 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. The tax rate is 30 percent and the discount rate is 9 percent.
Calculate the NPV for both conveyor belt systems. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))
NPV
System A $ -314,699
* System B $ 392,008.04
Which conveyor belt system should the firm choose?
System B
System A
Here are the calculations:
System A:
Depreciation = 212,000/4 = 53,000
Depreciation tax shield = 53,000*tax rate = 53,000*30% = 15,900
Annual cost cash flows (after depreciation tax shield) = 68,000*(1-30%)-15,900 = 31,700
So NPV = 212,000+31,700/1.09+31,700/1.09^2+31,700/1.09^3+31,700/1.09^4 = -314,699 (which is actually the net cost)
*System B:
Depreciation = 300,000/6 = 50,000
Depreciation tax shield = 50,000*tax rate = 50,000*30% = 15,000
Annual cost cash flows (after depreciation tax shield) = 62,000*(1-30%)-15,000 = 28,400
So NPV = 300,000+28,400/1.09+28,400/1.09^2+28,400/1.09^3+28,400/1.09^4 = 392,008.04 (which is actually the net cost)
As net cost is lower for System A, we should select System A