Question

one homework question, split into two parts.

part 1:

A machine can be purchased for $253,000 and used for five years, yielding the following net incomes. In projecting net incomes, double-declining depreciation is applied using a five-year life and a zero salvage value.

	Year 1				Year 2				Year 3				Year 4				Year 5
Net income		$	17,000			$	32,000			$	78,000			$	46,500			$	129,000

Compute the machine’s payback period (ignore taxes). (Round payback period answer to 3 decimal places.)

part 2:

1. A new operating system for an existing machine is expected to cost $770,000 and have a useful life of six years. The system yields an incremental after-tax income of $195,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $29,000.
2. A machine costs $540,000, has a $32,000 salvage value, is expected to last eight years, and will generate an after-tax income of $78,000 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.)

Answer 1

Answer with working notes is given below