Question
A) A new operating system for an existing machine is expected to cost $570,000 and have a useful life of six years. The system yields
A) A new operating system for an existing machine is expected to cost $570,000 and have a useful life of six years. The system yields an incremental after-tax income of $215,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $27,600.
B) A machine costs $530,000, has a $38,300 salvage value, is expected to last eight years, and will generate an after-tax income of $70,000 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.)
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