NPV Total and Differential Analysis of Replacement Decision (LO2)

White Snow Automatic Laundry must either have a complete overhaul of its current dry-cleaning system or purchase a new one. Its cost of capital is 20 percent. White Snow’s accountant has developed the following cost projections:

Present = New System System PinchnasercOSm NeW mamta tate soe tous st sk crsuacaeee $40,000 $50,000 ROMANO OKaValUC Pree esrier yeaa ails. te:- uoyaiiess\ shee a chen aa 15,000

@VvernallhMmeCGec emer radia: Sn crs le 6cue-m shoes sarcoeun 20,000 TIMUACASIMODEKAUMOICOStS ey tee sities ater o/s) iene) eaten nat 35,000 20,000

(CUTEIEEE INES VENICE 6 ots crs cae ano oe ceo criclos a 10,000 SRINEC VEIVETING WEISS o oncchsooba oconme mmapson S 2,500 10,000 If White Snow keeps the old system, it will have to be overhauled immediately. With the overhaul, the old system will have a useful life of five more years.

Required

a. Use the total cost approach to evaluate the alternatives of keeping the old system and purchasing the new system. Indicate which alternative is preferred.

b. Use the differential cost approach to evaluate the desirability of purchasing the new system.

 LO.1