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 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. 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 | $ | 112,000 | |
Cost of overhaul | 150,000 | ||
Annual expected revenues generated | 95,000 | ||
Annual cash operating costs after overhaul | 42,000 | ||
Salvage value of old machine in 5 years | 15,000 | ||
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 | $ | 300,000 | |
Salvage value of old machine now | 29,000 | ||
Annual expected revenues generated | 100,000 | ||
Annual cash operating costs | 32,000 | ||
Salvage value of new machine in 5 years | 20,000 | ||
Answer is not complete 1. Determine the nat procent value of alternativet Chart values are based on Table Present 1 S 26.000 0.9090 22.534 3 2 6.000 X 26.000XX 41,000 0.7513 0.53DE 0.5209 19.534 1 7.758 2 5457 107.000 5 S Present value of cash infows Present value of cash outlows Not present valueS 107,300 150.000 42131 2. Determine the natprocent value of alternative 2 In cash investoint) 12.000 10 2 0.900ES 0.9254 9 0.7513 917 2015 12.000 12.000XX 1200x 32.000 S 57.306 7.306 Present of cash flows Pest ashoutows Not presents Whio alternative should management caleat? Management should seit Alterative
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