Compute the net present value of each potential investment. Assume the company r

Question

Compute the net present value of each potential investment. Assume the company requires a 10% rate of return on its investments. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) a. A new operating system for an existing machine is expected to cost $640,000 and have a useful life of six years. The system yields an incremental after-tax income of $240,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $25,200.

A machine costs $470,000, has a $32,900 salvage value, is expected to last eight years, and will generate an after-tax income of $74,000 per year after straight-line depreciation.

Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow = Residual value = Net present value

Explanation / Answer

a. Cash flow Select Chart Amount x PV factor = Present Value Annual Cash flow Present Value of Annual cash flows $       3,42,467 x            4.3553 = $ 14,91,531.61 Residual Flow Present Value of salvage Value $           25,200 x            0.5645 = $       14,224.74 Present Value of cash inflows $ 15,05,756.36 Immediate Cash outflows $ -6,40,000.00 Net Present Value $    8,65,756.36 Working: i. Present value of annuity of 1 = (1-(1+0.10)^-6)/0.10 =      4.3553 ii. Present Value of 1 = (1+0.10)^-6 =      0.5645 iii. After Tax Income        2,40,000 Depreciation Expense (640000-25200)/6 =        1,02,467 Annual Cash inflow        3,42,467 b. Cash flow Select Chart Amount x PV factor = Present Value Annual Cash flow Present Value of Annual cash flows $       1,28,638 x            5.3349 = $    6,86,271.57 Residual Flow Present Value of salvage Value $           32,900 x            0.4665 = $       15,348.09 Present Value of cash inflows $    7,01,619.66 Immediate Cash outflows $ -4,70,000.00 Net Present Value $    2,31,619.66 Working: i. Present value of annuity of 1 = (1-(1+0.10)^-8)/0.10 =      5.3349 ii. Present Value of 1 = (1+0.10)^-8 =      0.4665 iii. After Tax Income            74,000 Depreciation Expense (470000-32900)/8 =            54,638 Annual Cash inflow        1,28,638

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