A new operating system for an existing machine is expected to cost $520,000 and
ID: 2585600 • Letter: A
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.) 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 S1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) a. 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 510,000. (Round your answer to the nearest whole dollar.) Cash Flow Annual cash flow Residual value Select Chart Amount PV Factor | = | Present Value Net present value b. 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.) Cash Flow Annual cash flow Residual value Select Chart Amount x PV Factor | =| Present Value Net present value
Explanation / Answer
a. Cost of operating system = $520,000 , Salvage Value = $10,000
Depreciation = 520,000 - 10,000 / 6 = 510,000 / 6 = 85,000 per year
After tax net income = 150,000
Cash flow = 150,000 + 85,000 = $235,000
PV of cashflows = 235,000 * PVAF (10% for 6 years) = 235,000 * 4.3553 = 1,023,495
NPV = 1,023,495 - 520,000 = $503,495
b. Cost of the machine = $380,000
Salvage value = $20,000
Depreciation = 380,000 - 20,000 / 8 = 360,000 / 8 = 45,000
After tax income = 60,000
After tax cash flows = 60,000 + 45,000 = 105,000
PV of cash flows = 105,000 * PVAF(10% for 8years) = 105,000*5.3349 = 560,164.5
NPV = 560,164.5 - 380,000 = $180,164.5
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