Angelo Bank is planning to replace some old ATM machines and has decided to use the York Machine. Anita Chavez, the controller, has prepared the analysis shown here. She has recommended the purchase of the machine based on the positive net present value shown in the analysis. The York Machine has an estimated useful life of five years and an expected residual value of $35,000. Its purchase price is $385,000. Two existing ATMs, each having a carrying value of $25,000, can be sold to a neighboring bank for a total of $50,000.

Annual operating cash inflows are expected to increase in the following manner:

Year 1......... $79,900

Year 2.........76,600

Year 3.........79,900

Year 4.........83,200

Year 5.........86,500

Angelo Bank uses straight-line depreciation. The minimum rate of return is 12 percent.

1. Analyze Chavez’s work. (Round to the nearest dollar.) What changes need to be made in her capital investment analysis?
2. What would be your recommendation to bank management about the purchase of the YorkMachine?

Angelo Bank Capital Investment Analysis Net Present Value Method Year Net Cash Inflows $85,000 80,000 85,000 90,000 95,000 35,000 Present Value Factor 0.909 0.826 0.751 0.683 0.621 0.621 Present Value 77,265 66,080 63,835 61,470 58,995 21,735 S349,380 4 5 (residual value) Total present value Initilal investment Less proceeds from the $385,000 sale of exiting ATM machines Net capital investment Net present value 50,000 (335,000) S 14,380