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ndeu Adams Corporation is considering the purchase of equipment employing hird vear. f the third technology to lower production costs in a product line. At
ndeu Adams Corporation is considering the purchase of equipment employing hird vear. f the third technology to lower production costs in a product line. At the end o management will close down the line and liquidate the remaining assets. The p require an investment of $500,000 in plant upgrade and equipm 830,000 in working capital, which will be recovered in full at the end of year .e three-year useful life, the new equipment will reduce labour and raw materials roject w ent and an additional usage sufficiently to cut operating costs from $9,000,000 to $8,850,000. It is estimated that the new equipment can be sold for $150,000 at the end of vear 3. If the new equipment were purchased, the old machine would be sold to another company for $170,000 rather than be traded in for the new equipment. If the old equipment is kept for three more years, the salvage value would be reduced to $70,000. Adams management uses 10% to discount the cash flows. Decide whether replacement is justified now, ignoring any tax consideration, using the following methods: a. Cash flow approach (insider's viewpoint approach). b. Opportunity cost approach (outsider's viewpoint approach)
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