A new operating system for an existing machine is expected to cost $710,000 and

Question

A new operating system for an existing machine is expected to cost $710,000 and have a useful life of six years. The system yields an incremental after-tax income of $175,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $12,800.

A machine costs $450,000, has a $38,300 salvage value, is expected to last eight years, and will generate an after-tax income of $62,000 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.)

A new operating system for an existing machine is expected to cost $710,000 and have a useful life of six years. The system yields an incremental after-tax income of $175,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $12,800. (Round your answers to the nearest whole dollar.)

2.

A machine costs $450,000, has a $38,300 salvage value, is expected to last eight years, and will generate an after-tax income of $62,000 per year after straight-line depreciation. (Round your answers to the nearest whole dollar.)

Can you please make it clear!

Thank You.

Explanation / Answer

Part 1 - Calculation of NPV (Net Present Value)

Note 1 - Calculation of Cash Inflow

Add : Depreciation (Non Cash item)

Depreciation = (Asset cost - Salvage value)/Useful Life

Here - Asset cost = $710000

Salvage Value = $12800

Useful life = 6 years

Depreciation = ($710000 - $12800)/6 = $116200

Note 2 - Calculation of Cumulative annuity

Cumulative Annuity = [1/1+r]n

Here, r = 10% or 0.1 & n = 6 years

Annuity = [1/1+0.1]6 = 4.355

NPV Calculation (Cash outflow - Present value of cash Inflow)

$291200

(Note 1)

Part 2 - Calculation of NPV (Net Present Value)

Step 1 - Calculation of cash Flow

NPV Calculation

$113462.5

5.335

[1/1.1]8

0.467

[1/1.1]8thyear

Add : Depreciation (Non Cash item)

Depreciation = (Asset cost - Salvage value)/Useful Life

Here - Asset cost = $710000

Salvage Value = $12800

Useful life = 6 years

Depreciation = ($710000 - $12800)/6 = $116200

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