Angelo 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 next 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 ATM's 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.

Year Net Cash Inflows Present Value Factor Present Value

1 $85,000 0.909 $77,265

2 $80,000 0.826 $66,080

3 $85,000 0.751 $63,835

4 $90,000 0.683 $61,470

5 $95,000 0.621 $58,995

5(Residual value) $35,000 0.621 $21,735

Total present value: $349,380

Initial investement $385,000

Less proceeds from the sale of $50,000

existing teller machines

Net capital investment ($335,000)

Net present value $14,380

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 York Machine?