You are the owner of a factory located in a hot tropical climate. The monthly production of the factory is $100,000 except during June September, when it falls to $80,000 due to the heat in the factory. In January 2017, you get an offer to install an air- conditioning system in your factory. The cost of the air- conditioning system is $150,000, and its expected life span is 10 years. If you install the air- conditioning system, the production in the summer months will equal the production in the winter months. However, the cost of operating the air- conditioning system is $9,000 per month (only in the 4 months that you operate the system). You will also need to pay a maintenance fee of $5,000 annually in October. Also assume that the depreciation costs are recognized in December of each year and that taxes are paid in December of each year. The depreciation is straight- line to salvage value zero (which is also the anticipated terminal value).

a. What is the December equivalent pre- tax and pre- depreciation annual profits?

b. What is the NPV of purchasing the air- conditioning system if the discount rate is 12% and corporate tax rate is 35%?