interstate manufacturing is considering either overhauling an old machine or replacing it with a new machine. information about the two alternatives follows. management requires a 10% rate of return on its investments. (pv of $1, fv of $1, pva of $1, and fva of $1) (use appropriate factor(s) from the tables provided.) alternative 1: keep the old machine and have it overhauled. this requires an initial investment of $158,000 and results in $44,000 of net cash flows in each of the next five years. after five years, it can be sold for a $19,000 salvage value. Cost of old machine $108,000
Cost of overhaul 150,000
Annual expected revenues generated 106,000
Annual cash operating costs after overhaul 51,000
Salvage value of old machine in 5 years 22,000
Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold.
Cost of new machine $292,000
Salvage value of old machine now 40,000
Annual expected revenues generated 87,000
Annual cash operating costs 28,000
Salvage value of new machine in 5 years 14,000
Required:
Determine the net present Value of Alternative 1
Initial cash investment (net).....
i= 12%
year Subsequent Cash inflow (outflow) Table Factor= Present Value
1 .8929 2 1.6901 3 2.4018 4 3.0373 5 3.6048 Present Value of cash inflows .
Present Value of cash outflows ..
Net present value ...
2. Determine the net present value of alternative 2. ^^ Same Format as above
3.Which alternative should management select?
