Question

. 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 12% rate of return on its investments. Compute the net present value of each potential Investment (PV of $1, PV of $1, PVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided.) Complete this question by entering your answers in the tabs below. Required A Required B 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. (Round your answers to the nearest whole dollar) Cash Flow PUH Annual cash flow Residual value Net present value Required B >

Answer 1

Answer a

A New Operating System for an existing Machine is expected
to cost $ 730000, useful life - 6 Years
The system Yields an Incremental after tax Income $ 280,000
each year after deducting the straight line depreciation
Salvage value precicted $ 22000
rate of return == 12%
Need to calculate depreciation
Cost $	7,30,000
salvage Value $	22,000
Net Cost $ ( A)	7,08,000
Useful life - Years-B	6
Depreciation Per year $-(A/B)	1,18,000
Annual Cash inflow	Amnt($)
After Tax Income	2,80,000
Add
Depreciation ( as above)	1,18,000
Yearly Cash inflow	3,98,000
Annuity - Discount Factor -12%
Year 1	0.89	)1/1.12)
Year 2	0.80	Year1/1.12
Year 3	0.71
Year 4	0.64
Year 5	0.57
Year 6	0.51
Sum of Discount Factor	4.111
Need to calculate Net Present Value
	Amnt($)
Cash inflow as above	3,98,000	A
PV factor cal as above	4.111	B
Present Value	16,36,340	(A*B)
Residual value
Salvage value =c	22,000
Discount factor 06th Year as above =d	0.51
Present Value(c*d)	11,146
Present Value
Cash inflow as above	16,36,340
Add - present Value of Salvage value	11,146
Total Present Value	16,47,486	C
Less - Initial Investment	7,30,000	D
NPV	9,17,486	(C-D)

So First answer showing NPV is +ve  

Answer b

A New Operating System for an existing Machine is expected
to cost $ 510000, useful life - 8 Years
The system Yields an Incremental after tax Income $ 88,000
each year after deducting the straight line depreciation
Salvage value precicted $ 22400
rate of return == 12%
Need to calculate depreciation
Cost $	5,10,000
salvage Value $	22,400
Net Cost $ ( A)	4,87,600
Useful life - Years-B	8
Depreciation Per year $-(A/B)	60,950
Annual Cash inflow	Amnt($)
After Tax Income	88,000
Add
Depreciation ( as above)	60,950
Yearly Cash inflow	1,48,950
Annuity - Discount Factor -12%
Year 1	0.89	)1/1.12)
Year 2	0.80	Year1/1.12
Year 3	0.71
Year 4	0.64
Year 5	0.57
Year 6	0.51
Year 7	0.45
Year 8	0.40
Sum of Discount Factor	4.968
Need to calculate Net Present Value
	Amnt($)
Cash inflow as above	1,48,950	A
PV factor cal as above	4.968	B
Present Value	7,39,930	(A*B)
Residual value
Salvage value =c	22,400
Discount factor 08th Year as above =d	0.40
Present Value(c*d)	9,047
Present Value
Cash inflow as above	7,39,930
Add - present Value of Salvage value	9,047
Total Present Value	7,48,977	C
Less - Initial Investment	5,10,000	D
NPV	2,38,977	(C-D)

Again in thi case also we derived +ve NPV