Miller Manufacturing is considering either replacing one of its old machines with a new one, or having the old machine repaired. Information about the two alternatives follows. Management requires a required rate of return of 10%. Alternative 1: Keep the old machine and have it repaired. If the old machine is repaired, it will be kept for another 5 years and then sold for its salvage value. Cost of old machine Cost of repairs Annual expected revenues generated Annual cash operating costs after repairs Salvage value of old machine in 5 years $125,000 160,000 96,000 40,000 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 Salvage value of old machine now Annual expected revenues generated Annual cash operating costs after repairs Salvage value of new machine in 5 years $305,000 28,000 100,000 30,000 18,000 Using Excel, set up each alternative and show the annual net cash flows. Use the NPV function in excel to solve. Which alternative would you select? Below is an example of how you would set up the problem in Excel: Alt. 1 Net cash Flows Alt. 2 Net cash Flows Yerl Yer 2 Yer 3 Yer 4 Yer 5 PV of cash flows Initial investment Salvage value now Net present value NPV formulahere na Besureto identify which alternative you would select. Miller Manufacturing is considering either replacing one of its old machines with a new one, or having the old machine repaired. Information about the two alternatives follows. Management requires a required rate of return of 10%. Alternative 1: Keep the old machine and have it repaired. If the old machine is repaired, it will be kept for another 5 years and then sold for its salvage value. Cost of old machine Cost of repairs Annual expected revenues generated Annual cash operating costs after repairs Salvage value of old machine in 5 years $125,000 160,000 96,000 40,000 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 Salvage value of old machine now Annual expected revenues generated Annual cash operating costs after repairs Salvage value of new machine in 5 years $305,000 28,000 100,000 30,000 18,000 Using Excel, set up each alternative and show the annual net cash flows. Use the NPV function in excel to solve. Which alternative would you select? Below is an example of how you would set up the problem in Excel: Alt. 1 Net cash Flows Alt. 2 Net cash Flows Yerl Yer 2 Yer 3 Yer 4 Yer 5 PV of cash flows Initial investment Salvage value now Net present value NPV formulahere na Besureto identify which alternative you would select
