The Templeton Manufacturing and Distribution Company of Tacoma, Washington, is contemplating the purchase of a new conveyor belt system for one of its regional distribution facilities. Both alternatives will accomplish the same task but the Eclipse Model is substantially more expensive than the Sabre Model and will not have to be replaced for 10 years, whereas the cheaper model will need to be replaced in just 5 years. The costs of purchasing the two systems and the costs of operating them annually over their expected lives is provided below:

Year Eclipse Sabre

0 $(1,350,000) $(750,000)

1 $(26,000) $(51,000)

2 $(29,000) $(51,000)

3 $(29,000) $(57,000)

4 $(29,000) $(57,000)

5 $(43,000) $(78,000)

6 $(43,000)

7 $(43,000)

8 $(43,000)

9 $(43,000)

10 $(43,000)

a. Templeton typically evaluates investments in plant improvements using a required rate of return of 11% What are the NPVs for the two systems?

b.Calculate the equivalent annual costs for the two systems.

c.Based on your analysis of the two systems using both their NPV and EAC, which system do you recommend the company pick? Why?