Effective cash flow = Income after tax + Depreciation |
Formula of Cumulative Discounting Factor = (1-(1+r)^-t)/r |
where. |
r = rate of interest |
t= time period |
PV = CF * (1-(1+r)^-t)/r |
where. |
PV = Present Value of future cash flows |
CF = Annual Cash flow |
r = rate of interest |
t= time period( no. of years) |
Formula of Discounting Factor for a particular year = (1+r)^t |
where. |
r = rate of interest |
t= time period ( year) |
PV = CF / (1+r)^t |
PV = Present Value of future cash flows |
CF = Cash flow |
r = rate of interest |
t= time period(year) |
a. | ||||||
Cash Flow | Select Chart | Amount | X | PV Factor | = | Present Value |
Annual Cash Flow | PVA of $ 1 | $381,433 | 4.355261 | $1,661,240 | ||
Residual Value | PV of $ 1 | $11,400 | 1.771561 | $6,435 | ||
Total Present Value of Future Cash Inflows | $1,667,675 | |||||
Initial Cash Outflow | ($530,000) | |||||
Net Present Value | $1,137,675 |
Working Notes | |||||
Given values | |||||
Cost of Machine = $ 530,000 | |||||
Annual Cash Inflow = $ 295,000 | |||||
Salvage Value of Asset = $ 11,400 | |||||
Rate of discounting = 10% | |||||
Useful life of asset = 6 years | |||||
After tax Cash flow = Income after tax + Depreciation | |||||
Depreciation charged is on straight line basis | |||||
Computation of Depreciation | |||||
= (Cost of Asset - Salvage Value)/Useful life of asset | |||||
=( $ 530,000 - $ 11.400)/6 | |||||
= $ 518,600/6 | |||||
= $ 86,433 | |||||
Total Yearly Cash Flow = $ 295,000 + $ 86,433 | |||||
= $ 381,433 | |||||
Cash Flow from salvage value in the sixth year = $ 11,400 | |||||
Amount | PV Factor | PV of CF | |||
Annual Cash Flow | $381,433 | 4.355261 | $1,661,240 | ||
Residual Cash Flow | $11,400 | 1.771561 | $6,435 | ||
Total Cash Flow | $1,667,675 |
b. | ||||||
Cash Flow | Select Chart | Amount | X | PV Factor | = | Present Value |
Annual Cash Flow | PVA of $ 1 | $131,525 | 5.334926 | $701,676 | ||
Residual Value | PV of $ 1 | $33,800 | 2.143589 | $15,768 | ||
Total Present Value of Future Cash Inflows | $717,444 | |||||
Initial Cash Outflow | ($510,000) | |||||
Net Present Value | $207,444 |
Working Notes | |||||
Given values | |||||
Cost of Machine = $ 510,000 | |||||
Annual Cash Inflow = $ 72,000 | |||||
Salvage Value of Asset = $ 33,800 | |||||
Rate of discounting = 10% | |||||
Useful life of asset = 8 years | |||||
After tax Cash flow = Income after tax + Depreciation | |||||
Depreciation charged is on straight line basis | |||||
Computation of Depreciation | |||||
= (Cost of Asset - Salvage Value)/Useful life of asset | |||||
=( $ 510,000 - $ 33800)/8 | |||||
= $ 476,200/8 | |||||
= $ 59,525 | |||||
Total Yearly Cash Flow = $ 72,000 + $ 59,525 | |||||
= $ 131,525 | |||||
Cash Flow from salvage value in the sixth year = $ 33,800 | |||||
Amount | PV Factor | PV of CF | |||
Annual Cash Flow | $131,525 | 5.334926 | $701,676 | ||
Residual Cash Flow | $33,800 | 2.143589 | $15,768 | ||
Total Cash Flow | $717,444 |
a. A new operating system for an existing machine is expected to cost $530,000 and have...
a. A new operating system for an existing machine is expected to cost $530,000 and have a useful life of six years. The system yields an incremental after-tax income of $235,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $25,200. b. A machine costs $390,000, has a $38,600 salvage value, is expected to last eight years, and will generate an after-tax income of $82,000 per year after straight-line depreciation. Assume the company requires...
. A new operating system for an existing machine is expected to cost $730.000 and have a useful life of six years. The system yields an incremental after-tax income of $280,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $22,000. b. A machine costs $510,000, has a $22,400 salvage value, is expected to last eight years, and will generate an after-tax Income of $88,000 per year after straight-line depreciation. Assume the company requires...
A new operating system for an existing machine is expected to cost $750,000 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 $29,200. A machine costs $510,000, has a $30,500 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 12%...
a. A new operating system for an existing machine is expected to cost $570,000 and have a useful life of six years. The system yields an incremental after-tax income of $235,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $14,000. b. A machine costs $600,000, has a $34,400 salvage value, is expected to last eight years, and will generate an after-tax income of $78,000 per year after straight-line depreciation Assume the company requires...
A new operating system for an existing machine is expected to cost $760,000 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 $24,400. A machine costs $460,000, has a $30,800 salvage value, is expected to last eight years, and will generate an after-tax income of $60,000 per year after straight-line depreciation. Assume the company requires a 12%...
a. 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 $190,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,800. b. A machine costs $450,000, has a $29,300 salvage value, is expected to last eight years, and will generate an after-tax income of $62,000 per year after straight-line depreciation. Assume the company requires...
a. A new operating system for an existing machine is expected to cost $667,000 and have a useful life of six years. The system yields an incremental after-tax income of $195,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $55,000. b. A machine costs $470,000, has a $38,000 salvage value, is expected to last eight years, and will generate an after-tax income of $105,000 per year after straight-line depreciation. Assume the company requires...
a. A new operating system for an existing machine is expected to cost $701,000 and have a useful life of six years. The system yields an incremental after-tax income of $205,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $65,000. b. A machine costs $490,000, has a $42,000 salvage value, is expected to last eight years, and will generate an after-tax income of $115,000 per year after straight-line depreciation. Assume the company requires...
Exercise 24-6 Net present value LO P3 a. A new operating system for an existing machine is expected to cost $670,000 and have a useful life of six years. The system yields an incremental after-tax income of $295,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $22,200. b. 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 $70,000 per year...
A new operating system for an existing machine is expected to cost $740,000 and have a useful life of six years. The system yields an incremental after-tax income of $215,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $25,000. A machine costs $380,000, has a $33,500 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%...