The managers at General Manufacturing Company are considering replacing the industrial lathe used in the company’s factory. The company’s cost of capital is 12 percent.

Required:

a. Prepare a relevant cost schedule showing the benefit of buying the new lathe. (For this requirement, ignore the time value of money.)

b. How much must the company invest today to replace the old lathe?

c. If the company replaces the old lathe, how much will be saved in operating costs each year?

d. Calculate the net present value of replacing the old lathe.

e. Do you think the company should replace the old lathe?

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Information about the old lathe: Cost Estimated useful life Estimated residual value Current age Estimated current fair value Annual operating cost Information about the new lathe: Cost Estimated useful life Estimated residual value Annual operating cost $57,000 8 years $0 2 years $32,000 $32,000 $61,000 6 years $0 $24,000