A. A new operating system for an existing machine is expected to cost $730,000 a

Question

A. A new operating system for an existing machine is expected to cost $730,000 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 $11,600. (Round your answers to the nearest whole dollar.)

Required A

B. A machine costs $570,000, has a $27,800 salvage value, is expected to last eight years, and will generate an after-tax income of $82,000 per year after straight-line depreciation.

Assume the company requires a 10% 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.)

Explanation / Answer

1) Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow Present Value of an Annuity of 1 359733 4.355261 = 1566731 Residual value Present Value of 1 11600 0.564474 = 6547.89759 Present value of cash inflows 1573278.89 Immediate cash outflows -730000 Net present value 843278.895 Annual cash flow = Net income after tax + Depreciation Depreciation under straight-line method = (cost of asset-Salvage value)/Useful life = (730000-11600)/6 = $119733 Annual cash flow = 240000+119733 = $359733 2) Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow Present Value of an Annuity of 1 149775 5.334926 = 799038.571 Residual value Present Value of 1 27800 0.466507 = 12968.9052 Present value of cash inflows 812007.476 Immediate cash outflows -570000 Net present value 242007.476 Annual cash flow = Net income after tax + Depreciation Depreciation under straight-line method = (cost of asset-Salvage value)/Useful life = (570000-27800)/8 = $67775 Annual cash flow = 82000+67775 = $149775

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