NPV Total and Differential Analysis of Replacement Decision Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $160,000 and have a salvage value of $16,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $18,000, as follows:

	Old Compressor	New Compressor
Salaries	$48,000	$60,000
Supplies	9,600	6,000
Utilities	18,400	12,000
Cleaning and maintenance	28,000	8,000
Total cash expenditures	$104,000	$86,000

If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $48,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $4,800. The old compressor's present book value is $68,000. If kept, the old compressor will require repairs one year from now predicted to cost $60,000. 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 compressor purchasing 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, net:	Answer	Answer
Operations	Answer	Answer
Repairs on old	Answer	Answer
Disinvestment	Answer	Answer
Net present value of costs		Answer

Net savings of Answerkeeping old compressor purchasing new compressor $Answer

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