Question

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 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, 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. Required A Required B 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. (Round your answers to the nearest whole dollar.) Select Chart Amount X PV Factor = Present Value Cash Flow Annual cash flow Residual value Net present value Required A Required B >

Answer 1

cash flow	select chart	amount	x	PV factor @12%=	present value
annual cash flow	present value annuity	295000	x	4.1114	1212863
residual value	present value	22200	x	0.5066	11246.52
	total present value of cash inflow				1224110
	less: initial investment				670000
	net present value				554109.5
cash flow	select chart	amount	x	PV factor @12%=	present value
annual cash flow	present value annuity	70000	x	4.9676	347732
residual value	present value	33800	x	0.4039	13651.82
	total present value of cash inflow				361383.8
	less: initial investment				570000
	net present value				-208616

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