Exercise 24-6 Net present value LO P3

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 $1 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 $570,000 and have a useful life of six years. The system yields an incremental after-tax income of $225,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $12,800.

b.	A machine costs $500,000, has a $34,700 salvage value, is expected to last eight years, and will generate an after-tax income of $78,000 per year after straight-line depreciation.