Question

5. 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.)

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 $200,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $23,400. (Round your answers to the nearest whole dollar.)

	Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow = Residual value = Net present value

A machine costs $520,000, has a $23,300 salvage value, is expected to last eight years, and will generate an after-tax income of $78,000 per year after straight-line depreciation. (Round your answers to the nearest whole dollar.)

	Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow = Residual value = Net present value

Answer 1

Requirement - 1

Straight Line Depreciation Expense = [Cost – Salvage Value] / Useful Life

= [$530,000 - $23,400] / 6 Years

= $84,433 per year

Annual cash flow = After Tax Income + Depreciation

= $200,000 + $84,433

= $284,433

	N=	6 Years
	I=	12%
Cash flow	Select chart	Amount	PV Factor	Present Value
Annual cash flow	Present value of annuity of $1	$284,433	4.1114	$11,69,418
Residual Value	Present Value of $1	$23,400	0.5066	$11,854
	Present Value of cash inflows			$11,81,272
	Present Value of cash outflows			$530,000
	Net Present Value			$651,272

Requirement – 2

Straight Line Depreciation Expense = [Cost – Salvage Value] / Useful Life

= [$520,000 - $23,300] / 8 Years

= $62,088 per year

Annual cash flow = After Tax Income + Depreciation

= $78,000 + $62,088

= $140,088

	N=	8 Years
	I=	12%
Cash flow	Select chart	Amount	PV Factor	Present Value
Annual cash flow	Present value of annuity of $1	$140,088	4.9676	$6,95,901
Residual Value	Present Value of $1	$23,300	0.4039	$9,411
	Present Value of cash inflows			$7,05,312
	Present Value of cash outflows			$520,000
	Net Present Value			$185,312

NOTE

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.