1 answer

A. A new operating system for an existing machine is expected to cost $530,000 and have...

Question:

a. A new operating system for an existing machine is expected to cost $530,000 and have a useful life of six years. The syste
Complete this question by entering your answers in the tabs below. Required A Required B A machine costs $510,000, has a $33,
a. A new operating system for an existing machine is expected to cost $530,000 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 $11,400. b. A machine costs $510,000, has a $33,800 salvage value, is expected to last eight years, and will generate an after-tax income of $72,000 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. EV of $1. PVA of $1, and EVA of $1) (Use appropriate factor(s) from the tables provided.) Complete this question by entering your answers in the tabs below. Required A Required B A new operating system for an existing machine is expected to cost $530,000 and have a useful life of slx 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 $11,400. (Round your answers to the nearest whole dollar.) -Present Value Cash Flow Select Chart Amount PV Factor X Annual cash flow Residual value Net present value Required B
Complete this question by entering your answers in the tabs below. Required A Required B A machine costs $510,000, has a $33,800 salvage value, is expected to last eight years, and will generate an after-tax income of $72,000 per year after straight-line depreciation. (Round your answers to the nearest whole dollar.) Cash Flow Select Chart Amount PV Factor Present Value X Annual cash flow Residual value Net present value <Required A

Answers

Effective cash flow = Income after tax + Depreciation
Formula of Cumulative Discounting Factor = (1-(1+r)^-t)/r
where.
r = rate of interest
t= time period
PV = CF * (1-(1+r)^-t)/r
where.
PV = Present Value of future cash flows
CF = Annual Cash flow
r = rate of interest
t= time period( no. of years)
Formula of Discounting Factor for a particular year = (1+r)^t
where.
r = rate of interest
t= time period ( year)
PV = CF / (1+r)^t
PV = Present Value of future cash flows
CF = Cash flow
r = rate of interest
t= time period(year)
a.
Cash Flow Select Chart Amount X PV Factor = Present Value
Annual Cash Flow PVA of $ 1 $381,433 4.355261 $1,661,240
Residual Value PV of $ 1 $11,400 1.771561 $6,435
Total Present Value of Future Cash Inflows $1,667,675
Initial Cash Outflow ($530,000)
Net Present Value $1,137,675
Working Notes
Given values
Cost of Machine = $ 530,000
Annual Cash Inflow = $ 295,000
Salvage Value of Asset = $ 11,400
Rate of discounting = 10%
Useful life of asset = 6 years
After tax Cash flow = Income after tax + Depreciation
Depreciation charged is on straight line basis
Computation of Depreciation
= (Cost of Asset - Salvage Value)/Useful life of asset
=( $ 530,000 - $ 11.400)/6
= $ 518,600/6
= $ 86,433
Total Yearly Cash Flow = $ 295,000 + $ 86,433
= $ 381,433
Cash Flow from salvage value in the sixth year = $ 11,400
Amount PV Factor PV of CF
Annual Cash Flow $381,433 4.355261 $1,661,240
Residual Cash Flow $11,400 1.771561 $6,435
Total Cash Flow $1,667,675
b.
Cash Flow Select Chart Amount X PV Factor = Present Value
Annual Cash Flow PVA of $ 1 $131,525 5.334926 $701,676
Residual Value PV of $ 1 $33,800 2.143589 $15,768
Total Present Value of Future Cash Inflows $717,444
Initial Cash Outflow ($510,000)
Net Present Value $207,444
Working Notes
Given values
Cost of Machine = $ 510,000
Annual Cash Inflow = $ 72,000
Salvage Value of Asset = $ 33,800
Rate of discounting = 10%
Useful life of asset = 8 years
After tax Cash flow = Income after tax + Depreciation
Depreciation charged is on straight line basis
Computation of Depreciation
= (Cost of Asset - Salvage Value)/Useful life of asset
=( $ 510,000 - $ 33800)/8
= $ 476,200/8
= $ 59,525
Total Yearly Cash Flow = $ 72,000 + $ 59,525
= $ 131,525
Cash Flow from salvage value in the sixth year = $ 33,800
Amount PV Factor PV of CF
Annual Cash Flow $131,525 5.334926 $701,676
Residual Cash Flow $33,800 2.143589 $15,768
Total Cash Flow $717,444
.

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