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. System A will have a salvage value of $5,600 and System B will have a salvage value of $4,800. Whichever system is chosen, it will be replaced when it wears out. The tax rate is 23 percent and the discount rate is 13.8 percent. Which system should the firm choose and why?
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