Question

1. A new operating system for an existing machine is expected to cost $640,000 and have a useful life of six years. The system yields an incremental after-tax income of $175,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $20,800.
2. A machine costs $550,000, has a $24,800 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 $640,000 and have a useful life of six years. The system yields an incremental after-tax income of $175,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $20,800. (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

A machine costs $550,000, has a $24,800 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 = Residual value = Net present value

Answer 1

Requirement (a)

Annual cash flow = Net Income + Straight Line Depreciation

= $175,000 + [($640,000 - $20,800)/6 Years]

= $175,000 + $103,200

= $278,200

Cash flow	Select chart	Amount	PV Factor	Present Value
Annual cash flow	Present value of annuity of $1	$278,200	4.3553	$1,211,644.46
Residual Value	Present Value of $1	$20,800	0.5645	$11,741.60
	Present Value of cash inflows			$1,223,386.06
	Less: Present Value of cash outflows			$640,000.00
	Net Present Value			$583,386.06

Requirement (b)

Annual cash flow = Net Income + Straight Line Depreciation

= $76,000 + [($550,000 - $20,800)/8 Years]

= $76,000 + $65,650

= $141,650

Cash flow	Select chart	Amount	PV Factor	Present Value
Annual cash flow	Present value of annuity of $1	$141,650	5.3349	$755,688.59
Residual Value	Present Value of $1	$24,800	0.4665	$11,569.20
	Present Value of cash inflows			$767,257.79
	Less: Present Value of cash outflows			$550,000.00
	Net Present Value			$217,257.79

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.