a. A new operating system for an existing machine is expected to cost $790,000 a
ID: 2588918 • Letter: A
Question
a. A new operating system for an existing machine is expected to cost $790,000 and have a useful life of six years. The system yields an incremental after-tax income of $165,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $23,600 b. A machine costs $600,000, has a $27.200 salvage value, is expected to last eight years, and will generate an after-tax income of $78,000 per year after straight-line depreciation 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
Answer:
1
First of all we will calculate the depreciation
Depreciation
=790,000-23600/6
=127,733
So net cash flow
=165000+127,733
=$292,733
Cash
flow
Amount
Pv
factor
Present
value
Annual Cash flow
292733
x
4.3553
=
1274941.487
Residual value
23600
x
0.5645
=
13322.2
Present value of cash flow
1288263.687
Immediate cash out flow
-790,000
Net present value
498,264
__________________________________
2
First of all we will calculate the depreciation
Depreciation
=600,000-27200/8
=71,600
net cash flow
=78000+71,600
=149,600
Cash
flow
Amount
PV
factor
Present
value
Annual Cash flow
149600
x
5.3349
=
798101.04
Residual value
27200
x
0.4665
=
12688.8
Present value of cash flow
810789.84
Immediate cash out flow
-600,000
Net present value
210,790
Cash
flow
Amount
Pv
factor
Present
value
Annual Cash flow
292733
x
4.3553
=
1274941.487
Residual value
23600
x
0.5645
=
13322.2
Present value of cash flow
1288263.687
Immediate cash out flow
-790,000
Net present value
498,264
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