Introduction to Finance

TA B L E L E 1 7 . 3
Cash Flow Summary and NPV Calculation ($ millions)
Year
Initial 
Outlay
Operating 
Cash Flows
Salvage 
Value
Total 
Incremental 
Cash Flows
PVIF 
(10%)
PV of 
Cash 
Flows
0
$–4.9
$ 0.000
$ 0.0
$–4.90
1.0000
$–4.90
1
0.0
1.679
0.0
1.679
0.9091
1.53
2
0.0
1.779
0.0
1.779
0.8264
1.47
3
0.0
1.779
0.0
1.779
0.7513
1.34
4
0.0
1.779
0.0
1.779
0.6830
1.22
5
0.0
1.879
0.6 
2.479
0.6209
1.54
NPV = $ 2.20

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17.13 Applications
559
computer system with a more cost-effi
cient model. The decision depends on the diff erence 
between the cash fl ows from the initial investment in the new equipment, the operating cash 
fl ows, and the salvage values.
Initial Investment Outlay
The total cost of the investment consists of the total outlay 
required to purchase and prepare the new computer for operation, less the after-tax salvage 
value of the older model. For simplicity, let’s assume the new computer’s expected useful life, 
three years, equals the expected remaining useful life of the old system. 
Table LE17.4
lists the depreciable cash outlays. Added to the purchase price of $7,700 
are transportation, hookup, and modifi cation costs, which result in a total depreciable cost 
of $12,000. Table LE17.4 also shows the after-tax salvage cash fl ow of the old system of 
$3,600. This brings the initial total cash outlay for this project to $12,000 minus $3,600, 
or $8,400.