Sneed has a freezer that is in need of repair and is considering whether to replace the old freezer with a new one or have the old freezer extensively repaired. Information about the two alternatives follows. Management has a 10% hurdle rate. Alternative 1: Keep the old freezer and have it repaired. If repaired, it will be kept for an additional eight ycars and then sold for its salvage value. Cost of old freezer $75,000 Cost of repair Annual expected revenues 50,000 63,000 Annual cash operating costs 55.000 Salvage value of freezer in 8 yrs 3,000 Alternative 2: Sell the old freezer and buy a new one. Because the new freezer is bigger than the old one, the company can earn more revenue. It is also energy efficient and will help with cost savings. Cost of new freezer $150,000 Salvage of old freezer now Annual expected revenues Annual cash operating costs Salvage value of new freezer in 8 yrs 5,000 68,000 30,000 8,000 What decision should be made and why? Present Value Factors: Lump sum 10%, 8 years .4665 .4632 Lump sum - 8%, 10 years Annuity - 10%, 8 years Annuity - 8%, 10 years 5.3349 6.7101 Reject Alternative B because the NPV is ($84,594) Repair the freezer because Alternative A only costs $5921 Repair the freezer because $75,000 is sunk cost and does not count. Replace the freezer because Alternative B is $61,458 better than Alternative A Replace the freezer because Alternative B is $67,379 better than Alternative A