Question

a. A new operating system for an existing machine is expected to cost $565,000 and have a useful life of six years. The system ylelds an incremental after-tax Income of $165.000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $25,000. b. A machine costs $410,000, has a $26,000 salvage value, is expected to last eight years, and will generate an after-tax Income of $75,000 per year after straight-line depreciation. Assume the company requires a 13% 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.) Answer is complete but not entirely correct. 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 $565,000 and have a useful life of six years. The system yields an incremental after-tax income of $165,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $25,000. (Round your answers to the nearest whole dollar.) Amount Cash Flow Annual cash flow Residual value $ $ 255.000 x 25.000X PV Factor 3.9980 X 0.4803 Select Chart Present Value of an Annuity of 1 Present Value of 1 Present value of cash inflows Immediate cash outflows Net present value Present Value $ 1.019.490 12,008 $ 1,031.498 (565,000) 468.498 Required A Required B >

Answer 1

SOLUTION

a.

Net present value of investment*

Present value of six $255,000** cash inflows ($255,000 x 3.9975).................	$1019362.50
Present value of $25000 at end of six years ($25000 x 0.5645)......................	14112.50
Present value of cash inflows............................................................................	1033475
Less immediate cash outflow............................................................................	565000
Net present value...............................................................................................	$ 468475

*Present value factors from tables at the end of Appendix B:

3.9975 = Present value of an annuity of 1, where n = 6, i = 13%  

0.4803 = Present value of 1, where n = 6, i = 13%  

**Cash inflow = net income + straight-line depreciation, $165000 + $90000 # (565000-25000)/6 years

b.

Net present value of investment*

Present value of eight $123000** cash inflows ($123000 x 4.7988)...........	$590252.40
Present value of $26,000 at end of eight years ($26,000 x 0.3762)...............	9781.20
Present value of cash inflows.........................................................................	600033.60
Less immediate cash outflow.........................................................................	410000
Net present value............................................................................................	$190033.60

*Present value factors from tables at the end of Appendix B:

4.7988 = Present value of an annuity of 1, where n = 8, i = 13%

0.3762 = Present value of 1, where n = 8, i = 13%n

**Cash inflow = net income + straight-line depreciation, $75000 + $48,000 #(410000-26000)/8 years