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Assume that a company is choosing between two alternatives-keep an existing machine or replace it with a new machine. The costs associated with the two alternatives are summarized as follows: New Machine $ 22,000 Purchase cost (new) Remaining book value Overhaul needed now Annual cash operating costs Salvage value (now) Salvage value (eight years from now) Existing Machine $ 15,000 $ 6,000 $ 5,000 $ 11,000 $ 2,000 $ 1,000 $ 7,000 $ 6,000 If the company overhauls its existing machine, it will be usable for eight more years. If it buys the new machine, it will be used for eight years. Assuming a discount rate of 19%, what is the net present value of the cash flows associated with replacing the existing machine with a new machine? Assume that a company is considering buying a piece of equipment that will save $5,000 per year in operating costs for nine years. Assuming the equipment has no salvage value and the company's discount rate is 12%, what is the maximum price the company should be willing to pay for the equipment? (Hint: The maximum price should exactly equal the present value of the annual savings in operating costs.) Assume that a company is choosing between two alternatives-keep an existing machine or replace it with a new machine. The costs associated with the two alternatives are summarized as follows: New Machine $ 22,000 Purchase cost (new) Remaining book value Overhaul needed now Annual cash operating costs Salvage value (now) Salvage value (eight years from now) Existing Machine $ 15,000 $ 6,000 $ 5,000 $ 11,000 $ 2,000 $ 1,000 $ 7,000 $ 6,000 If the company overhauls its existing machine, it will be usable for eight more years. If it buys the new machine, it will be used for eight years. Assuming a discount rate of 19%, what is the net present value of the cash flows associated with replacing the existing machine with a new machine? Assume that a company is considering buying a piece of equipment that will save $5,000 per year in operating costs for nine years. Assuming the equipment has no salvage value and the company's discount rate is 12%, what is the maximum price the company should be willing to pay for the equipment? (Hint: The maximum price should exactly equal the present value of the annual savings in operating costs.)Step by Step Solution
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