NPV Total and Differential Analysis of Replacement Decision Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $200,000 and have a salvage value of $20,000 in five years. Mitsubishis cost of capital is 16%. It would provide annual operating cash savings of $22,500, as follows:

	Old Compressor	New Compressor
Salaries	$60,000	$75,000
Supplies	12,000	7,500
Utilities	23,000	15,000
Cleaning and maintenance	35,000	10,000
Total cash expenditures	$130,000	$107,500

If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $60,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $6,000. The old compressors present book value is $85,000. If kept, the old compressor will require repairs one year from now predicted to cost $75,000. Required a. Use the total cost approach to evaluate the alternatives of keeping the old compressor and purchasing the new compressor. Indicate which alternative is preferred. Hint: Use a negative sign to indicate a negative net present value. Net present value of operating costs of keeping old compressor: $Answer

Net present value of purchasing and operating new compressor: $Answer

Net savings of Answerkeeping old compressorpurchasing new compressor

$Answer

b. Use the differential cost approach to evaluate the desirability of purchasing the new compressor. Note: There may be slight differences between your answers in part a and part b due to rounding. Note: Round each of your answers below to the nearest whole dollar.

		Present Value
	Predicted	of
	Cash Inflows (Outflows)	Cash Flows
Initial investment:	Answer	Answer
Operations	Answer	Answer
Repairs on old	Answer	Answer
Disinvestment	Answer	Answer
Net present value of costs		Answer

Net savings of Answerkeeping old compressorpurchasing new compressor

$Answer