Question

Exercise 24-6 Net present value LO P3 a. A new operating system for an existing machine is expected to cost $550,000 and have a useful life of six years. The system yields an incremental after-tax income of $210,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $23,800. b. A machine costs $570,000, has a $37,100 salvage value, is expected to last eight years, and will generate an after-tax income of $72,000 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. Required a Required B A new operating system for an existing machine is expected to cost $550,000 and have a useful life of six years. The system yields an incremental after-tax income of $210,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $23,800. (Round your answers to the nearest whole dollar.) Cash Flow Select Chart Amount * PV Factor Present Value Annual cash flow = $ Residual value 0 0 Net present value

Answer 1

a) calculation of NPV :

cash flow	amount	x	PV factor @ 10%	present value
annual cash inflow	$297700	x	4.3552 (for 6 years)	$1296543.04
salvage value	$23800	x	0.5644	$13432.72
total cash inflows				$1309975.76
less : initial investment	$550000	x	1	($550000)
net present value				$759975.76

so net present value = $759975.76 or $759976

annual cash inflow = income after depreciation and tax + depreciation = $210000 + $87700 = $297700

dereciation = (cost - salvage value)/useful life of assets = ($550000 - $23800)/6 = $87700

b) calculation of NPV :

cash flow	amount	x	PV factor @ 10%	present value
annual cash inflow	$138612.5	x	5.3349 (for 8 years)	$739483.83
salvage value	$37100	x	0..4665	$17307.15
total cash inflows				$756790.98
less : initial investment	$570000	x	1	($570000)
net present value				$186790.98

so net present value = $186790.98 or $186791

annual cash inflow = income after depreciation and tax + depreciation = $72000 + $66612.50 = $138612.50

dereciation = (cost - salvage value)/useful life of assets = ($570000 - $37100)/8 = $66612.50

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