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EnterTech has noticed a signicant decrease in the protability of its line of portable CD players. The production manager believes that the source of the trouble is old, inefficient equipment used to manufacture the product. The issue raised, therefore, is whether EnterTech should [1] buy new equipment at a cost of $120,000 or {2} continue using its present equipment. It is unlikely that demand for these portable CD players will extend beyond a ve-year time horizon. EnterTech estimates that both the new equipment and the present equipment will have a remaining useful life of ve years and no salvage value. The new equipment is expected to produce annual cash savings in manufacturing costs of $34,000. before taking into consideration depreciation and taxes. However, management does not believe that the use of new equipment will have any effect on sales volume. Thus, its decision rests entirely on the magnitude of the potential cost savings. The old equipment has a book value of $100,000. However, it can be sold for only $20,000 if it is replaced. EnterTech has an average tax rate of 40 percent and uses straight-line depreciation for tar: purposes. The company requires a minimum return of 12 percent on all investments in plant assets. 3. Compute the net present value of the new machine using the tables in Exhibits 25-3 and 26-4. {Round your \"PU factors\" to 3 decimal places.) 9 Answer Is complete but not entirely wrest. Present Value of $1 Due in n Periods* EXHIBIT 26-3 Number of Discount Rate Present Value of $1 Payable Periods in n Periods (n) 1% 11/2% 5% 6% 8% 10% 12% 15% 20% DO YOU A WN - 990 985 952 943 .926 909 893 .870 .833 980 .971 .907 .890 .857 .826 .797 .756 .694 .971 .956 864 .840 .794 .751 712 .658 .579 .961 .942 823 .792 .735 .683 .636 .572 .482 951 .928 .784 .747 681 .621 567 497 .402 942 .915 746 .705 630 .564 507 432 .335 933 .901 .711 .665 .583 513 452 376 279 923 .888 677 627 .540 .467 .404 .327 233 .914 .875 .645 592 .500 .424 .361 .284 .194 10 .905 .862 614 558 .463 .386 .322 247 . 162 20 820 .742 .377 .312 .215 . 149 .104 061 026 24 788 700 310 247 . 158 . 102 066 .035 013 36 699 .585 . 173 .123 063 .032 .017 007 .00 1 "The present value of $1 is computed by the formula p = 1/(1 + ijn, where p is the present value of $1, / is the discount rate, and n is the number of periods until the future cash flow will occur. Amounts in this table have been rounded to three decimal places and are shown for a limited number of periods and discount rates. Many calculators are programmed to use this formula and can compute present values when the future amount is enteredPresent Value of $1 to Be Received Periodically for n Periods EXHIBIT 26-4 Number of Discount Rate Present Value of a $1 Annuity Periods Receivable Each Period for n (n) 1% 11/2% 5% 6% 8% 10% 12% 15% 20% Periods DO YOU AWN - 0.990 0.985 0.952 0.943 0.926 0.909 0.893 0.870 0.833 1.970 1.956 1.859 1.833 1.783 1.736 1.690 1.626 1.528 2.941 2.912 2.723 2.673 2.577 2.487 2.402 2.283 2.106 3.902 3.854 3.546 3.465 3.312 3.170 3.037 2.855 2.589 4.853 4.783 4.329 4.212 3.993 3.791 3.605 3.352 2.991 5.795 5.697 5.076 4.917 4.623 4.355 4.111 3.784 3.326 6.728 6.598 5.786 5.582 5.206 4.868 4.564 4.160 3.605 7.652 7.486 6.463 6.210 5.747 5.335 4.968 4.487 3.837 8.566 8.361 7.108 6.802 6.247 5.759 5.328 4.772 4.031 10 9.471 9.222 7.722 7.360 6.710 6.145 5.650 5.019 4.192 20 18.046 17.169 12.462 11.470 9.818 8.514 7.469 6.259 4.870 24 21.243 20.030 13.799 12.550 10.529 8.985 7.784 6.434 4.937 36 30. 108 27.661 16.547 14.621 11.717 9.677 8.192 6.623 4.993
