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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 S1) (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. $115,000 159,000 112,000 42,000 Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years 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. $306,000 42,000 88.000 20,000 14.000 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 Required: Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: Year Cash inflow | x | Table factor | = | Present Value Determine the net present value of alternative 2. Initial cash investment (net) Year Cash inflow | x | Table factor | = | Present Value Now Which alternative should t select
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