Question

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 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 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. (Round your answers to the nearest whole dollar.).... Select Chart Amount * PV Factor - Present Value Cash Flow Annual cash flow Residual value Net present value

Answer 1

Solution a:

Annual depreciation = ($710,000 - $10,800) / 6 = $116,533

Annual cash inflows = Net income +Depreciation = $190,000 + $116,533 = $306,533

Cash Flow	Select Chart	Amount	*	PV factor	=	Present Value
Annual cash flow	PVA of $1	$306,533.00	*	4.11141	=	$1,260,283
Residual value	PV of $1	$10,800.00	*	0.50663	=	$5,472
	Present value of cash inflows					$1,265,754
	Initial Investment					$710,000
	Net Present Value					$555,754

Solution b:

Annual depreciation = ($450,000 - $29,300) / 8 = $52,588

Annual cash inflows = Net income +Depreciation = $62,000 + $52,588 = $114,588

Cash Flow	Select Chart	Amount	*	PV factor	=	Present Value
Annual cash flow	PVA of $1	$114,588.00	*	4.96764	=	$569,232
Residual value	PV of $1	$29,300.00	*	0.40388	=	$11,834
	Present value of cash inflows					$581,066
	Initial Investment					$450,000
	Net Present Value					$131,066