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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 10% 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 $ 121,000
Cost of overhaul 141,000
Annual expected revenues generated 89,000
Annual cash operating costs after overhaul 39,000
Salvage value of old machine in 5 years 21,000

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 $ 298,000
Salvage value of old machine now 37,000
Annual expected revenues generated 101,000
Annual cash operating costs 30,000
Salvage value of new machine in 5 years 6,000

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1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: Subsequent Cash inflow Year Table factor Present Value (outflow) = 2 3 4 5 = 2. Determine the net present value of alternative 2. Initial cash investment (net) Subsequent Cash inflow Year Table factor Present Value (outflow) = 2 3 4 5 Now II II I II 3. Which alte rnative should management select

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