a. A new operating system for an existing machine is expected to cost $520,000 a

Question

a. A new operating system for an existing machine is expected to cost $520,000 and have a useful life of six years. The system yields an incremental after-tax income of $150,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000 b. A machine costs $380,000, has a $20,000 salvage value, is expected to last eight years, and will generate an after-tax income of $60,000 per year after straight-line depreciation. Assume the company requires a 10% rate of return on its investments. Compute the net present value o each potential investment PV of S1, EV of S1. PVA of $1 and FVA of $) (Use appropriate factorfs) 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 $520,000 and have a useful life of six years. The system yields an incremental after-tax income of $150,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. (Round your answers to the nearest whole dollar.) Amount x PV Factor Annual cash now Residual value

Explanation / Answer

=150000+(520000-10000)/6 =235000

=60000+(380000-20000)/8=105000

Cash Flow Select Chart Amount X PV Factor = Present Value Annual Cash Flow Present Value of Annuity of 1 235000 X 4.3553 = 1023496 Residual value Present value of 1 10000 X 0.5645 = 5645 Present Value of Cash Inflow 1029141 Immediate cash Outflow 520000 Net Present Value 509141

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