Three Alternatives, Effects on Inventory Investments The Dull Company has a very stable operation that is not marked by detectable variations in production or sales.

The Dull Company has an old machine with a net disposal value of $5,000 now and $1,000 five years from now. A new Rapido machine is offered for

$25,000 cash or $20,000 with a trade-in. The new machine promises annual operating cash outflows of $2,000 as compared with the old machine’s annual outflow of $10,000. A third machine, the Quicko, is offered for $45,000 cash or

$40,000 with a trade-in; it promises annual operating cash outflows of $1,000.

The disposal values of the new machines five years hence will be $1,000 each.

Because the new machines will produce output more swiftly, the average investment in inventories will be as follows:

Old machine $100,000 Rapido 80,000 Quicko 50,000 The minimum desired rate of return is 20 percent. The company uses discounted cash-flow techniques to evaluate decisions.

Which of the three alternatives is most desirable? Show calculations. This company uses discounted cash-flow techniques for evaluating decisions. When more than two machines are being considered, the company favors computing the present value of the future costs of each alternative. The most desirable alternative is the one with the least cost.

P.V. of $1 at 20% for 5 years = .40 P.V. of annuity of $1 at 20% for 5 years = 3.00 Amount of $1 at 20% for 5 years = 2.20 Amount of annuity of $1 at 20% for 5 years = 8.00:  L01