Question
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
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 8% rate of return on its investments. Use the (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. 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 | $109,000 |
Cost of overhaul | 155,000 |
Annual expected revenues generated | 114,000 |
Annual cash operating costs after overhaul | 39,000 |
Salvage value of old machine in 5 years | 19,000 |
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 | $304,000 |
Salvage value of old machine now | 34,000 |
Annual expected revenues generated | 92,000 |
Annual cash operating costs | 21,000 |
Salvage value of new machine in 5 years | 10,000 |
Required: |
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