A) A new operating system for an existing machine is expected to cost $570,000 a

Question

A) A new operating system for an existing machine is expected to cost $570,000 and have a useful life of six years. The system yields an incremental after-tax income of $215,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $27,600.

B) A machine costs $530,000, has a $38,300 salvage value, is expected to last eight years, and will generate an after-tax income of $70,000 per year after straight-line depreciation.

Assume the company requires a 12% 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.)

Complete this question by entering your answers in the tabs below.

Required A

Required B

Complete this question by entering your answers in the tabs below.

Required A

Required B

Explanation / Answer

A Cash Flow Select Chart Amount X PV Factor = Present Value Annula Cash Flow PVA of $1 215000 X 4.111407 =             8,83,953 Ressidual Value PV of $ 27600 X 0.506631 =                 13,983 Total Discounted inflow             8,97,936 Less: Initial Outflow           -5,70,000 Net Present Value             3,27,936 B Cash Flow Select Chart Amount X PV Factor = Present Value Annula Cash Flow PVA of $1 70000 X 4.96764 =             3,47,735 Ressidual Value PV of $ 38300 X 0.403883 =                 15,469 Total Discounted inflow             3,63,204 Less: Initial Outflow           -5,30,000 Net Present Value           -1,66,796 A B year Dis fact year Dis fact 1 0.89285714 1 0.892857 2 0.79719388 2 0.797194 3 0.71178025 3 0.71178 4 0.63551808 4 0.635518 5 0.56742686 5 0.567427 6 0.50663112 6 0.506631 4.11140732 7 0.452349 8 0.403883 4.96764

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