a. A new operating system for an existing machine is expected to cost $580,000 a

Question

a. A new operating system for an existing machine is expected to cost $580,000 and have a useful life of six years. The system yields an incremental after-tax income of $175,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $19,600. (Round your answers to the nearest whole dollar.)

b. A machine costs $430,000, has a $27,800 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 = $0 Residual value = 0 Net present value

Explanation / Answer

Solution: a) Cash Flow Amount PV Factor@16.67% Present Value Annual Cash Flow 175000 3.62058       6,33,601.50 Residual Value 19600 0.396569             7,772.75 Total Present Value       6,41,374.25 Less: Outflow       5,80,000.00 Net Present Value           61,374.25 b) Cash Flow Amount PV Factor@12.5% Present Value Annual Cash Flow 78000 4.88204       3,80,799.12 Residual Value 27800 0.389744           10,834.88 Total Present Value       3,91,634.00 Less: Outflow       4,30,000.00 Net Present Value         -38,366.00

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