Question

a. A new operating system for an existing machine is expected to cost $730.000 and have a useful life of six years. The system yields an incremental after-tax income of $230,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $12,600. b. A machine costs $550,000, has a $31.400 salvage value, is expected to last eight years, and will generate an after-tax income of $82,000 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.) Complete this question by entering your answers in the tabs below. Required A Required B A new operating system for an existing machine is expected to cost $730,000 and have a useful life of six years. The system yields an incremental after-tax income of $230,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $12,600. (Round your answers to the nearest whole dollar) Select Chart Amount * PV Factor Present Value Cash Flow Annual cash fow Residual value Net present value Required B >

Answer 1

a.	Annual cashflow:
	After tax income			230000
	Add: Depreciation
	[(730000-12600)/6]			119,567
	Annual cashflow			349,567
	Cashflow		Amount	PV factor	Present Value
	Annual cashflow		349,567	4.1114	1,437,208
				(At 12% for 6 years)
	Residual value		12600	0.5066	6,383
				(At 12% for 6th year)
	Total cashflows				1,443,591
	Less: cost of investment				730,000
	Net present value				713,591
b.	Annual cashflow:
	After tax income			82,000
	Add: Depreciation
	[(550000-31400)/8]			64,825
	Annual cashflow			146,825
	Cashflow		Amount	PV factor	Present Value
	Annual cashflow		146,825	4.9676	729,368
				(At 12% for 8 years)
	Residual value		31400	0.4039	12,682
				(At 12% for 8th year)
	Total cashflows				742,050
	Less: cost of investment				550000
	Net present value				192,050