Question

a. A new operating system for an existing machine is expected to cost $530,000 and have a useful life of six years. The system yields an incremental after-tax income of $235,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $25,200. b. A machine costs $390,000, has a $38,600 salvage value, is expected to last eight years, and will generate an after-tax income of $82,000 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 EVA 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 $530,000 and have a useful life of six years. The system yields an incremental after-tax income of $235,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $25,200. (Round your answers to the nearest whole dollar) Amount Select Chart X PV Factor Present Value Cash Flow Annual cash flow Residual value Net present value

Answer 1

a.
Cash flows		Amount	X   PV Factor	Present value
Annual cash flows	Present value an annuity 1	235,000.00	4.11	966,179.00
Residual value	Present value of 1	25,200.00	0.51	12,766.32
	Present value of cash inflows			978,945.32
	Immediate cash outflows			(530,000.00)
	Net present value			448,945
b.
Cash flows		Amount	X   PV Factor	Present value
Annual cash flows	Present value an annuity 1	82,000.00	4.97	407,343.20
Residual value	Present value of 1	38,600.00	0.40	15,590.54
	Present value of cash inflows			422,933.74
	Immediate cash outflows			(530,000.00)
	Net present value			(107,066.26)