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Acme Company has some outdated equipment that must be replaced or overhauled. New equipment would cost $400,000, have a useful life of 10 years,

 

Acme Company has some outdated equipment that must be replaced or overhauled. New equipment would cost $400,000, have a useful life of 10 years, and a salvage value of $80,000. The annual operating costs of the new equipment would be $90,000 per year. Acme can sell the old equipment for $70,000. Acme's other option is to overhaul the old equipment at a cost of $250,000. The refurbished equipment would have a useful life of 10 years and a salvage value of $30,000. The annual operating costs of the refurbished equipment would be $110,000 per year. Acme uses a 10% discount rate to make capital budgeting decisions. Based on a net present value analysis, what is the financial advantage or disadvantage of overhauling rather than replacing the old equipment?

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