24-4A Computing net present value of alternate investments LO P3 Interstate Manufacturing is considering either replacing one of its old machines with a new machine or having the old machine overhauled. Information about the two alternatives follows. Management requires a 12% rate of return on its investments. (PV of $1. EV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value. Cost of old machine Cost of overhaul Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years $117,000 146,000 88,000 44,000 20,000 Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold. Cost of new machine Salvage value of old machine now Annual expected revenues generated Annual cash operating costs Salvage value of new machine in 5 years Required: 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: $309,000 44,000 116,000 31,000 10,000 Subsequent Cash Year X Table factor Inflow (outflow) Present Value 1 2 3 4 5 $ Required: 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: Year Subsequent Cash Inflow (outflow) x Table factor Present Value 1 2 = 3 4 5 2. Determine the net present value of alternative 2. Initial cash investment (net) $ 0 Year Subsequent Cash inflow (outflow) x Table factor Present Value 1 = 2 3 4 5 Now 3. Which alternative should management select? $ 0