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 Cost of overhaul Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years $ 108,000 152,000 88,000 39,000 25,000 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 Salvage value of old machine now Annual expected revenues generated Annual cash operating costs Salvage value of new machine in 5 years $300,000 45,000 104,000 25,000 9,000 Required: Answer is not complete. 1. Determine the net present value of alternative 1. 152,000 Initial cash investment (net) Chart values are based on: Year Table factor Present Value 1 $ 0.9090 2 Subsequent Cash inflow (outflow) 49,000 x 49,000 x 49,000 49,000 X 74,000x 0.8260 X 3 0.7510 x 44,541 40,474 36,799 33,467 45,880 201,161 4 0.6830 5 0.6200 x $ Present value of cash inflows $ 201,161 Present value of cash outflows Net present value 152,000 49,161 $ $ 255,000 Table factor = Present Value 0.9090 $ 2. Determine the net present value of alternative 2. Initial cash investment (net) Subsequent Year Cash inflow (outflow) 1 $ 79,000 2. 79,000 x 3 79,000 4 79,000 5 88,000 x Now 0.8260 0.7510 = 71,811 65,254 59,329 53,957 54,560 0.6830 0.6200 $ 304,911 $ Present value of cash inflows Present value of cash outflows Net present value 3. Which alternative should management select? Management should select: 304,911 255,000 49,911 $ Alternative 2