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Kingstown Corporations is trying to decide between two different conveyor belt systems System A costs $290,000, has a four-year life, and requires $80,000 in pre-tax annual operating costs System B costs $375,000 has a six-year life and requires $74,000 in pre tax annual operating costs. Both systems are to be depreciated at 30 percent per year (Class 10). Both systems can be sold as scrap at the end of their useful life System A can be sold for 15 percent of its original cost while sytem 8 can be sold for 10 percent of its original cost, The tax rate is 34 percent and the discount rate is 8 percent Assume that whichever project is chosen, it will not be replaced when it wears out, decides which project should the firm choose? Suppose KISC always needs a conveyor belt system when one wears out, it must be replaced which project should the firm choose now? Inputs Investment Cost Pre-tax Annual Operating Cost JUseful Life Salvage Value CCA Rate Tax rate Discount Rate System A $290,000 $80,000 4 15% System B $375,000 $74,000 6 10% 30% 34% 8% Question 4a Solutions System B System A Initial Cost After-tax Annual Operating Cost PV of After-tax Operating Cost PV CCA Tax Shield PV of Salvage Value NPV Replacement Option EAC System A EAC System B What system should be chosen if the company will not replace the conveyor belt when it wears out What system should be chosen if the company will replace the conveyor belt when it wears out Kingstown Corporations is trying to decide between two different conveyor belt systems System A costs $290,000, has a four-year life, and requires $80,000 in pre-tax annual operating costs System B costs $375,000 has a six-year life and requires $74,000 in pre tax annual operating costs. Both systems are to be depreciated at 30 percent per year (Class 10). Both systems can be sold as scrap at the end of their useful life System A can be sold for 15 percent of its original cost while sytem 8 can be sold for 10 percent of its original cost, The tax rate is 34 percent and the discount rate is 8 percent Assume that whichever project is chosen, it will not be replaced when it wears out, decides which project should the firm choose? Suppose KISC always needs a conveyor belt system when one wears out, it must be replaced which project should the firm choose now? Inputs Investment Cost Pre-tax Annual Operating Cost JUseful Life Salvage Value CCA Rate Tax rate Discount Rate System A $290,000 $80,000 4 15% System B $375,000 $74,000 6 10% 30% 34% 8% Question 4a Solutions System B System A Initial Cost After-tax Annual Operating Cost PV of After-tax Operating Cost PV CCA Tax Shield PV of Salvage Value NPV Replacement Option EAC System A EAC System B What system should be chosen if the company will not replace the conveyor belt when it wears out What system should be chosen if the company will replace the conveyor belt when it wears out

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