Problem 11-4A Computing net present value of alternate investments LO P3

Interstate Manufacturing is considering either replacing one of its old machines with a new machine or having the old machine overhauled. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value.

Cost of old machine $ 112,000 Cost of overhaul 150,000 Annual expected revenues generated 95,000 Annual cash operating costs after overhaul 42,000 Salvage value of old machine in 5 years 15,000 Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold.

Cost of new machine $ 300,000 Salvage value of old machine now 29,000 Annual expected revenues generated 100,000 Annual cash operating costs 32,000 Salvage value of new machine in 5 years 20,000