NPV Total and Differential Analysis of Replacement Decision Assume Pinstripes Cleaning and Restoration, near Dallas, Texas, must either have a complete overhaul of its current dry-cleaning system or purchase a new one. Its cost of capital is 16%. The following cost projections have been developed:

	Old System	New System
Purchase cost (new)	$85,000	$90,000
Remaining book value	17,000
Overhaul needed	25,000
Annual cash operating costs	60,850	40,200
Current salvage value	12,000
Salvage value in 5 years	4,500	10,000

If Pinstripes keeps the old system, it will have to be overhauled immediately. With the overhaul, the old system will have a useful life of five more years. Required a. Use the total cost approach to evaluate the alternatives of keeping the old system and purchasing the new system. Indicate which alternative is preferred. Hint: Use a negative sign to indicate a negative net present value. Net present value of operating old system: $Answer

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

Net savings of _________ purchasing new system $Answer

$Answer

b. Use the differential cost approach to evaluate the desirability of purchasing the new system. 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
Overhaul of old	Answer	Answer
Disinvestment	Answer	Answer
Net present value of costs		Answer