Carlson Manufacturing has some equipment that needs to be rebuilt or replaced. The following information has been gathered relative to this decision:
________________________________________ Present Equipment_____ New Equipment
Purchase cost new...................................................$50,000...................$48,000
Remaining book value...............................................$30,000...........................-
Cost to rebuild now..................................................$25,000...........................-
Major maintenance at the end of 3 years...........................$8,000....................$5,000
Annual cash operating costs.........................................$10,000....................$8,000
Salvage value at the end of 5 years..................................$3,000....................$7,000
Salvage value now.....................................................$9,000...........................-

Carlson uses the total cost approach to net present value analysis and a discount rate of 12%. Regardless of which option is chosen, rebuild or replace, at the end of five years Carlson Manufacturing will have no future use for the equipment.
If the new equipment is purchased, the present value of the annual cash operating costs associated with this alternative is:
a. ($28,840)
b. ($19,160)
c. ($14,420)
d. ($36,050)

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Present Equipment New Equipment Purchase cost new $50,000 $48,000 Remaining book value $30,000 Cost to rebuild now $25,000 $8,000 $5,000 Major maintenance at the end of 3 years Annual cash operating costs $10,000 $8,000 Salvage value at the end of 5 years $3,000 S7,000 $9,000 Salvage value now