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 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 San Angelo Federal Bank Capital Investment Analysis Net Present Value Method 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 The San Angelo Federal Bank uses straight line depreciation. The minimum rate of return is 12%. 1. Analyze Chavez's work. What changes need to be made in her capital investement analysis? 2. What would be your recommendation to bank management about the purchase of the York Machine? Use the attached spreadsheet for answers.

Chapter 10, C 4. Please ONLY place data in the yellow cells. 1. Managerial Analysis San Angelo Federal Bank Capital Investment Analysis Net Present Value Method Net Cash Inflows Year 12% Factor* Present Value (Rounded) 1 $ $ 2 3 4 5 $ 5 (residual value) Total present value of cash inflows Total present value of cash inflows $ Net capital investment Initial investment $ Less proceeds from sale of existing teller machines Net capital investment $ Net present value * Table 1 in Appendix B on present value tables. 2. Mangerial Analysis Ch 10 C4