Question

A new operating system for an existing machine is expected to cost $590,000 and have a useful life of six years. The system yields an incremental after-tax income of $160,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $21,800. A machine costs $450,000, has a $20,000 salvage value, is expected to last eight years, and will generate an after-tax income of $64,000 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.)

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A new operating system for an existing machine is expected to cost $590,000 and have a useful life of six years. The system yields an incremental after-tax income of $160,000 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.)

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

A machine costs $450,000, has a $20,000 salvage value, is expected to last eight years, and will generate an after-tax income of $64,000 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

Answer 1

New Operating System
Cash Flows	Amount ($)	Year	PVF @12%	Present Value ($)
Initial Cost	-590,000.00	0	1.00	-590,000.00
Annual Cash Flow	160,000.00	1-6	4.11	657,825.17
Residual Value	21,800.00	6	0.51	11,044.56
Net Present Value	78,869.73
New Machine
Cash Flows	Amount ($)	Year	PVF @12%	Present Value ($)
Initial Cost	-450,000.00	0	1.00	-450,000.00
Annual Cash Flow	64,000.00	1-8	4.97	317,928.95
Residual Value	20,000.00	8	0.40	8,077.66
Net Present Value	-123,993.39