Question
Assume that a company is choosing between two alternativeskeep an existing machine or replace it with a machine. The costs associated with the two alternatives
Assume that a company is choosing between two alternativeskeep an existing machine or replace it with a machine. The costs associated with the two alternatives are summarized as follows:
| Existing Machine | New Machine | |||||
| Purchase cost (new) | $ | 15,000 | $ | 26,000 | ||
| Remaining book value | $ | 6,000 | ||||
| Overhaul needed now | $ | 5,000 | ||||
| Annual cash operating costs | $ | 10,500 | $ | 7,000 | ||
| Salvage value (now) | $ | 2,000 | ||||
| Salvage value (eight years from now) | $ | 1,000 | $ | 6,000 | ||
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided. 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. Based on a net present value analysis with a discount rate of 24%, what is the financial advantage (disadvantage) of replacing the existing machine with a new machine?Multiple Choice
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$(5,651)
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$(7,331)
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$(6,981)
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$(6,131)
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Expert Systems In Auditing
Authors: J C Van Dijk, Paul Williams, Michael P. Cangemi
1st Edition
1349124761, 978-1349124763
