MBA 601 Chapter 10 Case 4 - Angelo Bank is planning to replace some old ATM

Angelo Bank is planning to replace some old ATM machines and has decided to use the York Machine. Anita Chavez, the controller, has prepared the analysis shown here. 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 ATMs, 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
Angelo Bank uses straight-line depreciation. The minimum rate of return is 12 percent.

Angelo 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 investment		$385,000
Less proceeds from the
Sale of existing ATM machines		50,000
Net capital investment				$335,000
Net present value				$14,380

1. Analyze Chavez’s work. (Round to the nearest dollar.) What changes need to be made in her capital investment analysis?

2. What would be your recommendation to bank management about the purchase of the York Machine?

TUTORIAL PREVIEW

San Angelo Federal Bank
Capital Investment Analysis
Net Present Value Method
Year		Net Cash Inflows		12% Factor*		Present Value (Rounded)
1		$ 85,000		0.893		$ 75,905
2		80,000		0.797		63,760

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