xercise 25-6 Net present value LO P3

A new operating system for an existing machine is expected to cost $770,000 and have a useful life of six years. The system yields an incremental after-tax income of $295,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $12,400.

A machine costs $470,000, has a $30,500 salvage value, is expected to last eight years, and will generate an after-tax income of $70,000 per year after straight-line depreciation.

Assume the company requires a 12% 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.

Cash Flow	Select Chart	Amount	x	PV Factor	=	Present Value
Annual cash flow	Future Value of 1	$420,233	x	4.3553	=	$1,830,241
Residual value		$18,600	x	0.5645	=	10,500
						$1,840,741
	Net present value

Cash Flow	Select Chart	Amount	x	PV Factor	=	Present Value
Annual cash flow					=	$0
Residual value					=	0
	Net present value