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 12% 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	$	108,000
Cost of overhaul		141,000
Annual expected revenues generated		86,000
Annual cash operating costs after overhaul		43,000
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	$	294,000
Salvage value of old machine now		34,000
Annual expected revenues generated		114,000
Annual cash operating costs		25,000
Salvage value of new machine in 5 years		7,000

Required:

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