Question

1. A new operating system for an existing machine is expected to cost $720,000 and have a useful life of six years. The system yields an incremental after-tax income of $275,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $21,800.
2. A machine costs $510,000, has a $33,800 salvage value, is expected to last eight years, and will generate an after-tax income of $66,000 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

	CALCULATION OF THE DEPRECIATION FOR PROJECT A
	Purchase Cost of Building	$                  7,20,000
	Less: Salvage Value	$                      21,800
	Net Value for Depreciation	$                  6,98,200
	Usefule life of the Assets (In Years )	$                                6	Years
	Depreciation per year = Value for Depreciation / 6 years =	$                  1,16,367
	CALCULATION OF THE NET CASH FLOW PER YEAR FROM PROJECT A
	Net income after after tax =	$                  2,75,000
	Add: Depreciation per year	$                  1,16,367
	Cash Flow Per year =	$                  3,91,367
	CALCULATION OF THE DEPRECIATION FOR PROJECT B
	Purchase Cost of Building	$                  5,10,000
	Less: Salvage Value	$                      33,800
	Net Value for Depreciation	$                  4,76,200
	Usefule life of the Assets (In Years )	$                                8	Years
	Depreciation per year = Value for Depreciation / 8 years =	$                      59,525
	CALCULATION OF THE NET CASH FLOW PER YEAR FROM PROJECT B
	Net income after after tax =	$                      66,000
	Add: Depreciation per year	$                      59,525
	Cash Flow Per year =	$                  1,25,525
	CALCULATION OF THE NET PRESENT VALUE OF THE PROJECT A
	Year	Cash Flow	PVF of $ 1 @ 10%	FV of $ 1
	Year 0	$                -7,20,000	1.0000	$        -7,20,000.00
	Year 1	$                  3,91,367	0.9091	$          3,55,787.88
	Year 2	$                  3,91,367	0.8264	$          3,23,443.53
	Year 3	$                  3,91,367	0.7513	$          2,94,039.57
	Year 4	$                  3,91,367	0.6830	$          2,67,308.70
	Year 5	$                  3,91,367	0.6209	$          2,43,007.91
	Year 6	$                  3,91,367	0.5645	$          2,20,916.28
	Year 6	$                      21,800	0.5645	$              12,305.53
		Net present Value =		$          9,96,809.39
	CALCULATION OF THE NET PRESENT VALUE OF THE PROJECT B
	Year	Cash Flow	PVF of $ 1 @ 10%	FV of $ 1
	Year 0	$                -5,10,000	1.0000	$        -5,10,000.00
	Year 1	$                  1,25,525	0.9091	$          1,14,113.64
	Year 2	$                  1,25,525	0.8264	$          1,03,739.67
	Year 3	$                  1,25,525	0.7513	$              94,308.79
	Year 4	$                  1,25,525	0.6830	$              85,735.26
	Year 5	$                  1,25,525	0.6209	$              77,941.15
	Year 6	$                  1,25,525	0.5645	$              70,855.59
	Year 7	$                  1,25,525	0.5132	$              64,414.17
	Year 8	$                  1,25,525	0.4665	$              58,558.34
	Year 8	$                      33,800	0.4665	$              15,767.95
		Net present Value =		$          1,75,434.56