Automated teller machines (ATMs) have become common in the banking industry. San Angelo Federal Bank is planning to replace some old teller machines and has decided to use the York Machine. Nola Chavez, the controller, has prepared the analysis that appears on the facing page and has recommended the purchase of the machine based on the positive net present value shown in the analysis.
The York Machine has an estimated useful life of five years and an expected residual value of $35,000. Its purchase price is $385,000. Two existing ATMs, each having a carrying value of $25,000, can be sold to a neighboring bank for a total of $50,000. Annual operating cash inflows are expected to increase as follows:
Year 1......................... $79,900
Year 2........................... 76,600
Year 3........................... 79,900
Year 4........................... 83,200
Year 5........................... 86,500
The bank uses straight-line depreciation. The minimum rate of return is 12 percent.
1. What changes need to be made in Chavez's capital investment analysis?
San Angelo Federal Bank
Capital Investment Analysis
Net Present Value Method

2. What would be your recommendation to bank management about the purchase of the York Machine?

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Net Cash Present-Value Present Year Value Inflows $85,000 80,000 85,000 90,000 95,000 35,000 Factors 909 826 751 683 621 621 $77,265 66,080 63,835 61,470 58,995 21,735 $349,380 4 5 (residual value) Total present value Initial investment Less proceeds from the $385,000 sale of existing ATMs50,000 Net capital investment Net present value (335,000) $ 14,380