Question

a A new operating system for an existing machine is expected to cost $790,000 and have a useful Iife of sbx years. The system ylelds an Incremental after-tax income of $160,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $11,800. b. A machine costs $450,000, has a $38,600 salvage value, Is expected to last elght years, and will generate an after-tax income of $84,000 per year after straight-line depreciation Assume the company requires a 10 % rate of retun 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 $790,000 and have a useful life of six years. The system yields an incremental after-tax income of $160,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $11,800. (Round your answers to the nearest whole dollar.) Select Chart x PV Factor Present Value Cash Flow Amount Annual cash flow Residual value Net present value Required B

Answer 1

Requirement - 1

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

= [$790,000 - $11,800] / 6 Years

= $129,700 per year

Annual cash flow = After Tax Income + Depreciation

= $160,000 + $129,700

= $289,700 per year

	N=	6 Years
	I=	10%
Cash flow	Select chart	Amount	PV Factor	Present Value
Annual cash flow	Present value of annuity of $1	$289,700	4.3553	$1,261,730
Residual Value	Present Value of $1	$11,800	0.5645	$6,661
	Present Value of cash inflows			$1,268,392
	Present Value of cash outflows			$790,000
	Net Present Value			$478,392

Requirement – 2

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

= [$450,000 - $38,600] / 8 Years

= $51,425 per year

Annual cash flow = After Tax Income + Depreciation

= $84,000 + $51,425

= $135,425 per year

	N=	8 Years
	I=	10%
Cash flow	Select chart	Amount	PV Factor	Present Value
Annual cash flow	Present value of annuity of $1	$135,425	5.3349	$722,479
Residual Value	Present Value of $1	$38,600	0.4665	$18,007
	Present Value of cash inflows			$740,486
	Present Value of cash outflows			$450,000
	Net Present Value			$290,486

NOTE

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

-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.