Compute the net present value of each potential investment.
Assume the company requires a 12% rate of return on its investments. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
a. A new operating system for an existing machine is expected to cost $580,000 and have a useful life of six years. The system yields an incremental after-tax income of $150,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $17,800.
b. A machine costs $400,000, has a $38,600 salvage value, is expected to last eight years, and will generate an after-tax income of $88,000 per year after straight-line depreciation.