Calculate the NPV for both conveyor belt systems.

The NPV of the two conveyor belt systems must be calculated by taking into consideration the annual operating costs and initial investment. You can also use this formula to determine NPV

NPV = (Cash Flow / (1 + r)^t) – Initial Investment

Here Cash Flow refers to the annual cash flow. r is the discounted rate and t the time period.

System A

  • Your initial investment of $290,000
  • Operating costs for the year are $85,000
  • The system’s life expectancy is four years
  • It is $72,500/year.
  • The annual cash flow is ($85,000 – $72,500)(1 – 0.34) = $47,925

NPV = (($47,925 / (1 + 0.11)^1) + ($47,925 / (1 + 0.11)^2) + ($47,925 / (1 + 0.11)^3) + ($47,925 / (1 + 0.11)^4)) – $290,000

System A NPV = $65,542.49

System B

  • Your initial investment of $405,000
  • Operating costs for the year are $75,000
  • The system’s life expectancy is six years
  • Depreciation = ($405,000/6) = $67.500 per annum
  • The annual cash flow is ($75,000 – $67,500)(1 – 0.34) = $40,825

NPV = (($40,825 / (1 + 0.11)^1) + ($40,825 / (1 + 0.11)^2) + ($40,825 / (1 + 0.11)^3) + ($40,825 / (1 + 0.11)^4) + ($40,825 / (1 + 0.11)^5) + ($40,825 / (1 + 0.11)^6)) – $405,000

System B NPV = 35,908.17

Based on the NPV calculations, it would be more financially beneficial for Hagar Industrial Systems Company to choose System A, as it has a higher NPV of $65,542.49 compared to System B’s NPV of $35,908.17. Based on this information, it is clear that system A will generate greater profits over the long-term.

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