Automated teller machines (ATMs) have become common in the banking industry. San Angelo Federal Bank is planning to replace some old teller machines and has decided to use the York Machine. Nola Chavez, the controller, has prepared the analysis shown at the top of the opposite page. 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

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

1. Analyze Chavez's work. 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?

Transcribed Image Text:

San Angelo Federal Bank Capltal Investment Analysls Net Present Value Method Net Cash Present Value Present Year Inflows 0.909 $ 77.265 2 5 (residual value) Total present value 385,000 Less proceeds from the sale of existing teller machines Net capital investment Net present value 14,380