Question

A new operating system for an existing machine is expected to cost $750,000 and have a useful life of six years. The system yields an incremental after-tax income of $160,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $29,200. A machine costs $510,000, has a $30,500 salvage value, is expected to last eight years, and will generate an after-tax income of $74,000 per year after straight-line depreciation. Assume the company requires a 12% rate of return on its investments. Compute the net present value of each potential investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

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• Required A

A new operating system for an existing machine is expected to cost $750,000 and have a useful life of six years. The system yields an incremental after-tax income of $160,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $29,200. (Round your answers to the nearest whole dollar.)

	Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow = $0 Residual value = 0 Net present value

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• Required B

A machine costs $510,000, has a $30,500 salvage value, is expected to last eight years, and will generate an after-tax income of $74,000 per year after straight-line depreciation. (Round your answers to the nearest whole dollar.)

	Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow = $0 Residual value = 0 Net present value

Answer 1

A
	Cash Flow	Select Chart	Amount	x	PV Factor	=	Present Value
	Annual cash flow	Present Value of an Annuity 1	280,133.33	x	4.11141	=	1,151,743
	Residual value	Present Value of 1	29,200	x	0.50663	=	14,794
		Present value of cash inflows					1,166,537
		Immediate cash outflows					-750,000
		Net present value				416,537
	Annual Cash flow = $160,000 + ($750,000 - $29,200)/6 years = $280,133.33
B
	Cash Flow	Select Chart	Amount	x	PV Factor	=	Present Value
	Annual cash flow	Present Value of an Annuity 1	133,937.50	x	4.96764	=	665,353
	Residual value	Present Value of 1	30,500	x	0.40388	=	12,318
		Present value of cash inflows					677,672
		Immediate cash outflows					-510,000
		Net present value				167,672
	Annual Cash flow = $74,000 + ($510,000 - $30,500)/8 years = $133,937.50