Question
One of X Company's production machines was badly damaged recently. Unfortunately, the machine was purchased just two years earlier for $45,000. The company must either
One of X Company's production machines was badly damaged recently. Unfortunately, the machine was purchased just two years earlier for $45,000. The company must either repair the machine or purchase a new machine. The estimated cost of repairing the machine is $20,000, after which operating costs will be $63,000 a year. It will also require a maintenance check in the second year that is estimated to cost $2,000.
A new machine will cost $80,000, but it will be more efficient than the repaired machine, with annual operating cost savings of $12,000.
Both the repaired machine and the new machine will last for four years, at which time the repaired one would be worthless, and new one would be worth $6,000. If it is not repaired, the damaged machine can be sold immediately for $4,000.
Assuming a discount rate of 4%, what is the net present value of buying the new machine instead of repairing the damaged machine? [Use the present value tables in the Coursepack.]
A: $1,312 | B: $1,745 | C: $2,321 | D: $3,087 | E: $4,105 | F: $5,460 |
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