A new operating system for an existing machine is expected to cost $520,000 and

Question

A new operating system for an existing machine is expected to cost $520,000 and have a useful life of six years. The system yields an incremental after-tax income of $150,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. (Round your answer to the nearest whole dollar.)

      

A machine costs $380,000, has a $20,000 salvage value, is expected to last eight years, and will generate an after-tax income of $60,000 per year after straight-line depreciation. (Round your answer to the nearest whole dollar.)

   

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 $1and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Explanation / Answer

Given the rate is 10%

Npv = $150000(Pv @10% for 6 years) + 10000(Pv of 6th year) - $520,000

= $150,000*4.355 + 10000*0.565-$520000

=653289.1+5644.739-$520,000

=658934 - $520,000

=$138934

B)NPV of machine =$60000(PV @ 10% for 8 yrs) + $20000(Pv @ 10% for 8th year) - $380,000

=60000*5.334926 + 20000*0.466507 - $380,000

=320095.6 + 9330.148 - $380000

=($50574) Npv is negative in this case so machine cannot be purchased

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