Question

1. A new operating system for an existing machine is expected to cost $760,000 and have a useful life of six years. The system yields an incremental after-tax income of $265,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $25,400.
2. A machine costs $420,000, has a $35,900 salvage value, is expected to last eight years, and will generate an after-tax income of $68,000 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)

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 $760,000 and have a useful life of six years. The system yields an incremental after-tax income of $265,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $25,400. (Round your answers to the nearest whole dollar.)

Complete this question by entering your answers in the tabs below.

• Required A
• Required B

A machine costs $420,000, has a $35,900 salvage value, is expected to last eight years, and will generate an after-tax income of $68,000 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

	Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow Present Value of an Annuity of 1 = $0 Residual value Present Value of 1 = 0 Present value of cash inflows Present value of cash inflows Net present value

Answer 1

Requirement A:

Cost of Machine = $760,000
Salvage Value = $25,400
Useful Life = 6 years

Annual Depreciation = (Cost of Machine - Salvage Value) / Useful Life
Annual Depreciation = ($760,000 - $25,400) / 6
Annual Depreciation = $122,433.33

Annual Net Cash Flow = Annual Net Income + Annual Depreciation
Annual Net Cash Flow = $265,000 + $122,433.33
Annual Net Cash Flow = $387,433.33

Required Return = 10%

PVA of $1 (10%, 6) = 4.3553
PV of $1 (10%, 6) = 0.5645

Requirement B:

Cost of Machine = $420,000
Salvage Value = $35,900
Useful Life = 8 years

Annual Depreciation = (Cost of Machine - Salvage Value) / Useful Life
Annual Depreciation = ($420,000 - $35,900) / 8
Annual Depreciation = $48,012.50

Annual Net Cash Flow = Annual Net Income + Annual Depreciation
Annual Net Cash Flow = $68,000 + $48,012.50
Annual Net Cash Flow = $116,012.50

Required Return = 10%

PVA of $1 (10%, 8) = 5.3349
PV of $1 (10%, 8) = 0.4665