Question

a. A new operating system for an existing machine is expected to cost $620,000 and have a useful life of six years. The system yie an incremental after-tax income of $165,000 each year after deducting its straight-line depreciation. The predicted salvage value the system is $17,400. b. A machine costs $590,000, has a $37,100 salvage value, is expected to last eight years, and will generate an after-tax income of $62,000 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 FVA 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 $620,000 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 $17,400. (Round your answers to the nearest whole dollar.) Select Chart PV Factor = Present Value Cash Flow Annual cash flow Residual value Amount x $ 265,433 x $ 17,400 x = $ 0.5066 = 8.815 Net present value < Required A Required B

Answer 1

1)

Annual Cash Flow

265433 x 4.108 = 1090400

Residual Value

17400 x 0.5066 = 8815

Total Cash Inflows = Annual Cash Flow + Residual Value

= 1090400 + 8815

=1099215

Total Cash Outflows = 620000

Net Present value = Total Cash Inflows - Total Cash Outflows

=1099215 - 620000

=479215

	Profit after tax	Depreciation	Total Cash Inflows	Present value @ 12%	Present value
1	165000	100433	265433	0.892	236767
2	165000	100433	265433	0.797	211550
3	165000	100433	265433	0.711	188723
4	165000	100433	265433	0.635	168550
5	165000	100433	265433	0.567	150501
6	165000	100433	265433	0.506	134309
			1592600	4.108	1090400

Depreciation = 620000 - 17400 / 6 = 100433

2)

Annual Cash Flow

131113 x 4.963 = 650711

Residual Value

37100 x 0.403 = 14951

Total Cash Inflows = Annual Cash Flow + Residual Value

= 650711 + 14951

=665662

Total Cash Outflows = 590000

Net Present value = Total Cash Inflows - Total Cash Outflows

=665662 - 590000

=75662

	Profit after tax	Depreciation	Total Cash Inflows	Present value @ 12%	Present value
1	62000	69113	131113	0.892	116952
2	62000	69113	131113	0.797	104497
3	62000	69113	131113	0.711	93221
4	62000	69113	131113	0.635	83256
5	62000	69113	131113	0.567	74341
6	62000	69113	131113	0.506	66343
7	62000	69113	131113	0.452	59263
8	62000	69113	131113	0.403	52838
			1048900	4.963	650711

Depreciation = 590000 - 37100 / 8 = 69113