Question

A new operating system for an existing machine is expected to cost $600,000 and have a useful life of six years. the system yields an incremental after-tax income of $155,000 each year after deducting its straight-line depreciation. the predicted salvage value of the system is $16,600. a machine costs $390,000, has a $24,500 salvage value, is expected to last eight years, and will generate an after-tax income of $60,000 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.)

Answer 1

For the first investment the solution as follows
Annual depreciation
600,000÷6 years=100,000

Net annual cash flows
100,000+155,000=255,000

Present value
255,000×4.11141+16,600×0.50663
=1,056,819.608

Net present value
1,056,819.608−600,000=456,819.608

For the second investment the solution as follows
Annual depreciation
390,000÷8 years=48,750

Net annual cash flows
48,750+60,000=108,750

Present value
108,750×4.96764+24,500×0.40388
=550,125.91

Net present value
550,125.91−390,000=160,125.91