NPV Total and Differential Analysis of Replacement Decision Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $400,000 and have a salvage value of $40,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $45,000, as follows: Old Compressor New Compressor Salaries Supplies $120,000 $150,000 24,000 15,000 Utilities 46,000 Cleaning and maintenance Total cash expenditures 70,000 $260,000 30,000 20,000 $215,000 If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $120,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $12,000. The old compressor's present book value is $170,000. If kept, the old compressor will require repairs one year from now predicted to cost $150,000. 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: $ 979,913.34