A new operating system for an existing machine is expected to cost $590,000 and

Question

A new operating system for an existing machine is expected to cost $590,000 and have a useful life of six years. The system yields an incremental after-tax income of $285,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $17,400.

A machine costs $550,000, has a $35,300 salvage value, is expected to last eight years, and will generate an after-tax income of $80,000 per year after straight-line depreciation.

Complete this question by entering your answers in the tabs below. Required ARequiredB A new operating system for an existing machine is expected to cost $590,000 and have a useful life of six years. The system yields an incremental after-tax income of $285,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $17,400. (Round your answers to the nearest whole dollar.) Select Chart Amount x PV FactorPresent Value Cash Flow Annual cash flow Residual value Net present value Required A Required B>

Explanation / Answer

Answer 1. Calculation of NPV Particulars Year 10% Factor Amount Present value C D C X D Cash Inflow Net Cash Inflow 1-6          4.35526    380,433.00    1,656,884.63 Residula Value 6          0.56447      17,400.00            9,821.78 A. Total Cash Inflow - PV    1,666,706.41 Cash Outflow Cost of Investment 0          1.00000    590,000.00        590,000.00 B. Total Cash Outflow - PV        590,000.00 NPV (A - B)    1,076,706.41 Depreciation Expenses per Annum = ($590,000 - $17,400) / 6 Years = $95,433.33 or say $95,433 per annum Cash inflow per annum = $2,85,000 + $95,433 Cash inflow per annum = $380,433 Answer 2. Calculation of NPV Particulars Year 10% Factor Amount Present value C D C X D Cash Inflow Net Cash Inflow 1-6          5.33493    144,338.00        770,033.13 Residula Value 8          0.46651      35,300.00          16,467.80 A. Total Cash Inflow - PV        786,500.93 Cash Outflow Cost of Investment 0          1.00000    550,000.00        550,000.00 B. Total Cash Outflow - PV        550,000.00 NPV (A - B)        236,500.93 Depreciation Expenses per Annum = ($550,000 - $35,300) / 8 Years = $64,337.50 or say $64,338 (Approx.) Cash inflow per annum = $80,000 + $64,338 Cash inflow per annum = $144,338

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