Vandezande Inc. is considering the acquisition of a new machine that costs $370,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are (Ignore income taxes.):

Incremental Net Operating Income Incremental Net Cash Flows

Year 1 $ 54,000 $ 128,000

Year 2 $ 31,000 $ 105,000

Year 3 $ 52,000 $ 126,000

Year 4 $ 49,000 $ 123,000

Year 5 $ 48,000 $ 122,000

Use Excel or tables on A-12 and A-13 in text. Show calculations.

Assume cash flows occur uniformly throughout a year except for the initial investment.

If the discount rate is 10%, the net present value of the investment is:

A) $370,000

B) $457,479

C) $234,000

D) None of the above

I need to know how to solve for it as well. Thank you!

332 Cost Il A-12 Appendix Capital Investment Decisions: An Overview Self-Study Questions Nu-Concepts, Inc., a southeastern advertising agency, is depreciated for tax purposes, It can be sold for an es- years. If Nu-Concepts does not buy the new equipment, ments in operations and benefits from the computer system worth $16,000 per year before taxes. mediately for tax purposes. The company expects to use Nu-Concepts uses a 10 percent discount rate for the new machine for four years and to use straight-line de- his investment and has a marginal income tax rate preciation for financial reporting purposes. The market for of 40 percent after considering both state and federal used computer systems is such that Nu-Concepts could taxes. sell the equipment for $2,000 at the end of four years. The a. Prepare a schedule showing the relevant cash software would have no salvage value at that time. flows for the project. Nu-Concepts management believes that the intro- b. Indicate whether the project has a positive or nega- duction of the computer system will enable the com- tive net present value. pany to dispose of its existing equipment, which is fully The solution to this question is at the end of the Appendix. Exhibit A.8 Present Value of $1 5% 6% 8% 10% 2% 14% 15% 16% 18% 20% 0.952 0.943 0.890 0.893 0.870 0.862 0.847 0.840 0.857 0.826 0.797 0.769 0.756 0.743 0.794 0.735 0.675 0.658 0.641 0.609 0.579 0.784 0.592 0.572 0.552 0.482 0.681 0.621 0.567 0.519 0.476 6 ........ 0.746 0.705 0.630 0.665 0.507 0.410 0.583 0.456 0.513 0.400 0.370 0.376 8 ........ 0.677 0.404 0.351 0.327 0.305 0,266 0.233 0.645 0.500 0.361 0.308 0.284 0.263 0.614 0.225 10 ........ 0.463 0.386 0.429 0.322 0.270 0.191 0.162 11 ......... 0.585 0.350 0.287 0.237 0.215 0.195 0.162 0.135 12 ........ 0.557 0.497 0.397 0.319 0.257 0.208 0.187 0.168 0.137 13 ........ 0.530 0.469 0.368 0.290 0.112 0.229 0.182 0.163 0.145 0.116 0.093 0.442 0.340 0.263 0.205 0.160 0.141 0.125 0.099 0.078 0.417 0.315 0.239 0. 183 0.123 0,108 0.065 Year ..... 24% 26% 30% 32% 34% 35% 40% 0.806 0.800 0.794 0.781 0.746 0.741 0.650 0.640 0.630 0.610 0.592 0.574 0.557 0.549 0.510 0.551 0.524 0.512 0.500 0.477 0.455 0.435 0.416 0.406 0.364 4 ........ 0.451 0.423 0.410 0.397 0.373 0.350 0.329 0.310 0.301 0.260 5 ........ 0.370 0.341 0.328 0.315 0.269 0.250 0.231 0.223 0.186 6 . ....... 0.303 0.275 0.262 0.250 0.227 0.207 0.189 0.173 0.165 0.133 7 ........ 0.249 0.222 0.210 0.198 0.159 0.143 0.129 0.122 0.095 0.204 0.179 0.168 0.157 0.139 0.123 0.108 0.096 0.091 0.068 0.144 0.134 0.125 0.108 0.094 0.082 0.072 0.067 0.048 10 ........ 0.137 0. 116 0.099 0.085 0.073 0.035 0.112 0.094 0.086 0.079 0.066 0.056 0.047 0.040 0.037 12 ........ 0.092 0.076 0.069 0.052 0.043 0.036 0.030 0.027 0.018 13 ........ 0.075 0.061 0.050 0.040 0.033 0.027 0.022 0.013 14 ........ 0.062 0.049 0.044 0.039 0.032 0.025 0.021 0.017 0.015 0.009 15 ,..... 0.051 0.040 0.035 0.031 0.025 0.020 0.016 0.012 0.011 0.006Fundamentals of Cost Accounting, Fifth Edition Appendix Capital Investment Decisions: An Overview Exhibit A.9 Present Value of an Annuity of $1 5% 8% 12% Year 0.943 0.926 0.909 14% 0.952 1.859 1.833 1.783 1.736 0.893 15% 16% 2 . .. ..... 2.723 2.673 3.465 3.312 2.487 1.690 0.870 1.626 0.862 3.546 4.212 3.993 3.170 1.605 0.847 209% 4.329 4.917 4.623 4.355 3.605 5 ........ 3.433 2.855 2.246 1.566 0.833 5.076 5.582 4.868 3.889 2.798 6 ........ 5.786 5.206 5.747 4.564 3.784 3.274 2.690 6.210 5.335 2.580 6.463 6.802 6.247 2.901 7.360 6.710 5.759 4.968 7.108 4.039 3.498 6.145 4.946 4.487 4.772 4.344 3426 10 ........ 7.139 6.495 5.650 5.216 3.605 5.019 4.078 11 .. . ...... 8.306 8.863 8.384 7.536 6.814 5.938 4.303 9.394 8.853 7.904 5.234 4.494 12 ......". 7.103 6.194 5.660 5.029 9.899 9.295 8.244 6.424 5.842 4:327 14 ........ 9.712 8.559 7.606 6.628 6.002 5.583 5.342 4.910 4.439 15 ........ 10.380 6.811 6.142 5.847 5.468 5.575 5.008 4.611 24% 4.675 Year 22% 25% 26% 28% 30% 32% 0.820 0.806 0.800 0.794 34% 0.781 35% 40% 2 . ....... 1.457 1.440 1.424 1.392 0.769 0.758 0.746 1.981 1.952 1.923 1.868 1.303 1.289 0.714 2.042 2.494 2.362 2.320 2.241 2.166 1.766 2.096 1.719 1.224 2.404 1.816 4 ........ 1.589 5 ........ 2.864 2.745 2.689 2.635 2.532 2.436 2.029 1.849 6 ........ 3.167 3.020 2.951 2.885 2.759 2.643 2.260 2.035 3.416 3.242 3. 161 2.937 2.534 2.433 2.385 2.168 7 ........ 2.802 3.619 3.421 3.329 3.241 3.076 2.677 2.925 2.562 2.508 8 ........ 2.786 3.366 3.184 3.019 2.658 3.463 2.868 2.598 3.786 3.566 2,730 2.331 3.571 3.465 2.930 2.665 10 . ...... 3.923 3.682 3.269 3.092 2.784 2.715 2.414 4.035 3.776 3.656 3.543 3.335 2.978 2.824 11 ........ 2.752 4. 127 3.851 3.725 3.606 3.387 3.013 2.853 2.779 2.456 12 ........ 4.203 3.912 3.780 3.656 3.427 3.223 3.040 2.876 2.799 2.469 13 ........ 14 ........ 4.265 3.962 3.695 3.459 3.249 3.061 2.814 2.478 3.859 3.726 3.483 3.268 3.076 2.905 2.825 15 ........ 4.315 4.001 KEY TERMS present value, A-2 acquisition, A-4 tax basis, A-6 punt rate, A-2 tax shield, A-5 vestment flows, A-6 time value of money, A-1 tment tax credit (ITC), A-4 working capital, A-4