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The management of Iroquois National Bank is considering an investment in automatic teller machines. The machines wou...

The management of Iroquois National Bank is considering an investment in automatic teller machines. The machines would cost $131,100 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $28,500 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.
Net Present Value
(a) 10 percent $7,638
(b) 12 percent
(c) 14 percent
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Answer #1

ANSWER:

Net present value = present value of annual net cash flow - initial investment

(a)

NPV = ($28500 x 4.868) - $131100

= $138738 - $131100

= $7638

where,

PVAF(10% , 7) = 4.868

(b)

NPV = ($28500 x 4.564) - $131100

= $130074 - $131100

= -$1026

where,

PVAF(12% , 7) = 4.564

(c)

NPV = ($28500 x 4.288) - $131100

= $122208 - $131100

= -$8892

where,

PVAF(14% , 7) = 4.288

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