Net present value LO P3
A new operating system for an existing machine is expected to cost $820,000 and have a useful life of six years. The system yields an incremental after-tax income of $240,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $100,000.
A machine costs $560,000, has a $56,000 salvage value, is expected to last eight years, and will generate an after-tax income of $150,000 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. A new operating system for an existing machine is expected to cost $820,000 and have a useful life of six years. The system yields an incremental after-tax income of $240,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $100,000. (Round your answers to the nearest whole dollar.)
b. A machine costs $560,000, has a $56,000 salvage value, is expected to last eight years, and will generate an after-tax income of $150,000 per year after straight-line depreciation. (Round your answers to the nearest whole dollar.)