Question

Homework 5 wing is Information On Two Alternative invest Chape.com *5 i Help S a. A new operating system for an existing machine is expected to cost $770,000 and have a useful life of six years. The system yields an incremental after-tax income of $220,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $23,200. b. A machine costs $430,000, has a $31,700 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 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.) Complete this question by entering your answers in the tabs below. CE Required A Required B A new operating system for an existing machine is expected to cost $770,000 and have a useful life of six years. The system yields an incremental after-tax income of $220,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $23,200. (Round your answers to the nearest whole dollar) Cash Flow Select Chart Amount X PV Factor Present Value Annual cash flow Present Value of an Annuity of 1 Residual value Present Value of 1 Present value of cash inflows Immediate cash outflows Net present value Required >

Answer 1

a.
Straight line deprecaition = (Original value - Salvage Value) / Salvage Value
= ($770000-23200)/6 = $124467
Net Cash Flows = $220000+124467 = $344467

	n =	6
	I =	10%
Annual Cash flow	Present Value of annuity	$ 3,44,467	4.3556	$    15,00,360
Residual Value	Present Value	$    23,200	0.5645	$          13,096
	Total PV			$    15,13,457
	Less Investment			$      7,70,000
	NPV			$      7,43,457

b.
Straight line deprecaition = (Original value - Salvage Value) / Salvage Value
= ($430000-31700)/8 = $49787.50
Net Cash Flows = $64000+49787.50 = $113787.50

	n =	8
	I =	10%
Annual Cash flow	Present Value of annuity	$ 1,13,788	5.3353	$      6,07,090
Residual Value	Present Value	$    31,700	0.4665	$          14,788
	Total PV			$      6,21,878
	Less Investment			$      4,30,000
	NPV			$      1,91,878