a. A new operating system for an existing machine is expected to cost $730,000 a
ID: 2598998 • Letter: 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.)
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. (Round your answers to the nearest whole dollar.)
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
A.
843,180
Cost = 730,000
Useful life = 6 years
Salvage value = 11,600
Depreciation under Straight line method = (cost - salvage value) / useful life
= (730,000 - 11,600) / 6
= 119,733
After tax income = 240,000
Annual cash flows = After tax income + Depreciation
= 240,000 + 119,733
= 359,733
B.
Cost = 570,000
Salvage value = 27,800
Useful life = 8 years
Depreciation = (cost - salvage value) / useful life
= (570,000 - 27,800) / 8
= 67,775
After tax income = 82,000
After tax cash flows = After tax income + Depreciation
= 82,000 + 67,775
= 149,775.
Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow Present Value of an Annuity of 1 359,733 4.355 = 1,566,637.215 Residual value Present Value of 1 11,600 0.564 = 6,542.4 Present value of cash inflows 1,573,179.615 Immediate cash outflows 730,000 Net present value843,180
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