Clark Creations is considering a proposal to sell an existing lathe and purchase a new

computer-operated lathe. Information on the existing lathe and the computer-operated

lathe follow:

Existing

lathe

Computer-operated

lathe

Original Cost

$100,000

$300,000

Carrying Value

40,000

-

Fair Value now

20,000

-

Salvage value in 4 years

-

60,000

Annual cash operating

costs

200,000

50,000

Remaining useful life

4

years

4

years

Assuming that the company's cost of capital is 10%, which is to be used in discounted cash flow

analysis. Requirement:

a) Compute the net present value of investing in the computer-operated lathe.

b) Compute the profitability index of investing in the computer-operated lathe.