Question
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
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:
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
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.
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 compressor's present book value is $85,000. If kept, the old compressor will require repairs one year from now predicted to cost $75,000. Net savings ofStep by Step Solution
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