Question
Rembrandt Reproduction Company is considering replacing a special printer the company uses to make high quality prints of famous paintings. Selected information about the two
Rembrandt Reproduction Company is considering replacing a special printer the company uses to make high quality prints of famous paintings. Selected information about the two alternatives is given below:
| Old Printer | New Printer |
Original Cost | $17,000 | $25,000 |
Accumulated Depreciation | 12,000 | N/A |
Current Resale Value | 6,000 | N/A |
Annual Operating Cost | 13,000 | 10,000 |
Remaining Useful Life | 8 years | 8 years |
*please show calculations*
(1) Rembrandt Reproductions will:
- opt to buy the new machine because the net advantage over eight years of doing so is $5,000
- opt to buy the new machine because the annual operating cost savings are $3,000
- opt to use the old machine because it cost less than the new machine
- opt to use the old machine because the net disadvantage over eight years of buying the new machine is $1,000
(2) If Rembrandt Reproductions opts to replace its printer, the payback period on the new printer is:
- 2.5 years
- 8.3 years
- 8.0 years
- 6.5 years
- 6.3 years
(3) Rembrandt Reproduction's accountant just completed a finance seminar at Santa Monica College. She wants to apply a more rigorous analytical technique to evaluating the above proposal. Specifically, she intends to calculate the proposal's net present value. She uses a rate of 7% to discount the proposal's cash flows. On the basis of the accountant's analysis, Harrison will:
- ignore the net present value analysis because the selling the old machine results in a $1,000 gain
- opt to use the old machine because the net present value of buying the new machine is negative
- opt to buy the new machine because the net present value of replacing the old machine is positive
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