Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a
Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1, FV 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. This requires an initial investment of $159,000 and results in $43,000 of net cash flows in each of the next five years. After five years, it can be sold for a $22,000 salvage value. Alternative 2: Sell the old machine for $38,000 and buy a new one. The new machine requires an initial investment of $298,000 and can be sold for a $7,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $59,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which alternative should management select based on net present value? Year 1-5 Salvage value (year 5) Totals Initial investment Net present value Net Cash Present Value Present Value of Flows Factors at 10% Cash Flows $ 43,000 3.7908 $ 163,004 22,000 3.7908 83,398 246,402 159,000 87,402 Year 1-5 Salvage value-new machine Salvage value-old machine Totals Initial investment Net present value Net Cash Flows Present Value Factors at 10% Present Value of Cash Flows 7,000 38,000 1.0000 0 298,000
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started