EDP Is Trying to Decide Between Two Different Conveyor Belt

question 67

Multiple Choice

EDP is trying to decide between two different conveyor belt systems. System A costs $438,000, has a six-year life, and requires $83,000 in pretax annual operating costs. System B costs $369,000, has a five-year life, and requires $92,000 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 23 percent and the discount rate is 14.2 percent. Which system should the firm choose and why?

• A) A; The net present value is −$398,516.
• B) B; The net present value is −$553,041.
• C) A; The net present value is −$547,836.
• D) B; The net present value is −$608,222.
• E) B: The net present value is −$490,696.

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Definitions:

Deposits

Money placed into a financial institution for safekeeping, which can earn interest over time depending on the type of account.

Reserves

Assets kept on hand by a bank, company, or government to meet future liabilities, emergencies, or regulatory requirements.

Easy Money Policy

A monetary policy that increases the money supply and lowers interest rates, aimed at stimulating economic growth.

Dollar

A unit of currency used in the United States and some other countries, symbolized by "$".