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 Chavezs 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 Net Cash Inflows Present Value Factor Present Value Year $85,000 77,265 0.909 0.826 66,080 80,000 85,000 0.751 63,835 61,470 90,000 0.683 0.621 95,000 58,995 5 (residual value) 35,000 0.621 21,735 Total present value 349,380 Initial investment $385,000 Less proceeds from the sale of existing ATM machines 50,000 Net capital investment (335,000) Net present value 14,380