Question

1. A new operating system for an existing machine is expected to cost $680,000 and have a useful life of six years. The system yields an incremental after-tax income of $155,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $26,000.
2. A machine costs $530,000, has a $24,200 salvage value, is expected to last eight years, and will generate an after-tax income of $76,000 per year after straight-line depreciation.

Assume the company requires a 10% 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.)

A new operating system for an existing machine is expected to cost $680,000 and have a useful life of six years. The system yields an incremental after-tax income of $155,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $26,000. (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

A machine costs $530,000, has a $24,200 salvage value, is expected to last eight years, and will generate an after-tax income of $76,000 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

Ans : 1) New operating System

Expected cost $680,000

useful life of six years

Yields an incremental after-tax income of $155,000 each year after deducting its straight-line depreciation

Predicted salvage value of the system is $26,000

Depriciation - ($680,000-$26,000)/6

- $109,000

Incremental Cash Flow every Year - $155,000+$109,000

- $264,000

Cash Flow	Select Chart	Amount ($)	*	PV Factor @ 10%	=	Present Value ($)
Initial Cash outflow	0	($680,000)		1		($680,000)
Incremental Cash Inflow	1-6	$264,000		4.355		$1,149,720
Salvage Value	6	$26,000		0.564		$14,664
NPV						$484,384

2) Machine

Expected cost $530,000

useful life of 8 years

Yields an incremental after-tax income of $76,000 each year after deducting its straight-line depreciation

Predicted salvage value of the system is $24,200

Depriciation - ($530,000-$24,200)/8

- $63,225

Incremental Cash Flow every Year - $76,000+$63,225

- $139,225

Cash Flow	Select Chart	Amount ($)	*	PV Factor @ 10%	=	Present Value($)
Initial Cash outflow	0	($530,000)		1		($530,000)
Incremental Cash Inflow	1-8	$139,225		5.335		$742,765
Salvage Value	8	$24,200		0.467		$11,301
NPV						$224,066