Question

1. A new operating system for an existing machine is expected to cost $710,000 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 $21,800.
2. A machine costs $570,000, has a $33,800 salvage value, is expected to last eight years, and will generate an after-tax income of $84,000 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.)

A new operating system for an existing machine is expected to cost $710,000 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 $21,800. (Round your answers to the nearest whole dollar.)

A machine costs $570,000, has a $33,800 salvage value, is expected to last eight years, and will generate an after-tax income of $84,000 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 = Residual value = Net present value

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

Answer 1

												PV Factor @ 12%
		1	Computation of NPV of New Operating System									0.892857143
												0.797193878
			Depreciation per year				114700					0.711780248
			Annual cash flow			=155000+114700	269700					0.635518078
												0.567426856
						Amount	PV Factor		Present Value			0.506631121	4.111407
			Annual Cash Flow			269700	4.111407		1,108,846.56			0.452349215
			Residual Value			21800	0.506631		11,044.56			0.403883228
									1,119,891.11				4.96764
							Cost		710,000.00
							NPV		409,891.11
		2	Computation of NPV of Machine
			Depreciation per year				67025
			Annual cash flow			=84000+67025	151025
						Amount	PV Factor		Present Value
			Annual Cash Flow			151025	4.96764		750,237.80
			Residual Value			33800	0.403883		13,651.25
									763,889.05
							Cost		570,000.00
							NPV		193,889.05