A new operating system for an existing machine is expected to cost $630,000 and have a usetud ife of six years. The system yields an incrementalater tax income of $195,000 each year after deducting its straight line depreciation. The predicted salvage value of the system is $26,200 b. A machine costs $540.000 hes a $35.000 salvage value is expected to last eight years, and will generate an after tax income of $82.000 per year after streghe-ne depreciation Assume the company requires a 12% rate of return on its investments Compute the net present value of each potential investment PYSSEY ES EVA of 35 and EVAS Use appropriate factor from the tables provided)
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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#### Problem Description:
1. **Scenario A:**
- A new operating system for an existing machine is expected to cost $630,000 and have a useful life of six years.
- The system yields an incremental after-tax income of $155,000 each year after deducting straight-line depreciation.
- The predicted salvage value of the system is $26,000.
2. **Scenario B:**
- An existing system with a cost of $540,000, a $35,000 salvage value, and a useful life of eight years is being analyzed.
- The system will generate an after-tax income of $62,000 per year after straight-line depreciation.
#### Task:
- Compute the net present value of each potential investment [e.g., PV of $1, PVA of $1], and EVA of $1). Use the appropriate factors from the tables provided.
#### Required:
- **Question A:** Calculate based on the given data.
- **Question B:** Specific details are not provided in the image.
#### Table for Calculations:
- **Cash Flow Analysis:**
- Cash Flow: Enter specific amounts.
- Select Chain: Options for selecting specific data chains.
- Amount: Input expected cash flows.
- PF Factor: Present Value (PV) Factor relevant for calculations.
- Present Value: Display the present value calculated from the input data.
#### Diagram/Graph Explanation:
The image contains a tabular format for entering and calculating investment details such as cash flows, present value factors, and their corresponding present values. Users are expected to input their answers in these fields to compute the desired net present value for decision-making.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F923c47c7-6a18-449e-b6e3-a7725be8ab20%2Ffcf7de5e-dbe6-4b37-af28-6671de5c0ac3%2Fzdf9agq_processed.jpeg&w=3840&q=75)
Net present value is determined by deducting the initial investment from the current value of cash flows. it is an essential tool for businesses and investors to use when deciding how to allocate resources and where to place their money since it helps them decide whether a project will add value and assist an organization in achieving its financial objectives. The positive NPV suggests that the predicted cash inflows surpass the investment, indicating that the investment is profitable. If it is negative, it indicates that an investment may be unprofitable.
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