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	$ 11,500	$ 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 17%, what is the financial advantage (disadvantage) of replacing the existing machine with a new machine?

Multiple Choice

• $1,357

• $1,837

• $507

• $157