Question

A new operating system for an existing machine is expected to cost $660,000 and have a useful life of six years. The system yields an incremental after-tax income of $270,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $21,400. A machine costs $520,000, has a $36,800 salvage value, is expected to last eight years, and will generate an after-tax income of $74,000 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.)

Answer 1

First sytem:

Year	Cash flow	× factor@ 10.00%	Present value
0	$    (660,000.00)	1.0000	$          (660,000.00)
1	$     380,000.00	0.9091	$           345,454.55
2	$     380,000.00	0.8264	$           314,049.59
3	$     380,000.00	0.7513	$           285,499.62
4	$     380,000.00	0.6830	$           259,545.11
5	$     380,000.00	0.6209	$           235,950.10
6	$     401,400.00	0.5645	$           226,579.84
			$                            -
			$                            -
			$                            -
NPV		4.3553	$        1,007,078.81

Second system:

Year	Cash flow	× factor@ 10.00%	Present value
0	$    (520,000.00)	1.0000	$          (520,000.00)
1	$     139,000.00	0.9091	$           126,363.64
2	$     139,000.00	0.8264	$           114,876.03
3	$     139,000.00	0.7513	$           104,432.76
4	$     139,000.00	0.6830	$             94,938.87
5	$     139,000.00	0.6209	$             86,308.06
6	$     139,000.00	0.5645	$             78,461.88
7	$     139,000.00	0.5132	$             71,328.98
8	$     175,800.00	0.4665	$             82,012.00
			$                            -
			$                            -
NPV		5.3349	$           238,722.21