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. 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 | $107,000 |
Cost of overhaul | 148,000 |
Annual expected revenues generated | 109,000 |
Annual cash operating costs after overhaul | 45,000 |
Salvage value of old machine in 5 years | 18,000 |
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 | 30,000 |
Annual expected revenues generated | 86,000 |
Annual cash operating costs | 22,000 |
Salvage value of new machine in 5 years | 14,000 |
Required: Answer is not complete
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