The management of Kangaroo Manufacturing Company is currently evaluating a proposal to purchase a new, innovative drill press as a replacement for a less efficient piece of similar equipment, which would then be sold. The cost of the equipment, including delivery and installation, is $270,000. If the equipment is purchased, Dusseldorf will incur a $7,500 cost in removing the present equipment and revamping service facilities. The present equipment has a book value of $150,000 and a remaining useful life of ten years. Because of new technical improvements that have made the present equipment obsolete, it now has a disposal value of only $60,000. Management has provided the following comparison of manufacturing costs:

Additional information follows:

Management believes that if the current equipment is not replaced now, it will have to wait ten years before replacement is justifiable.

Both pieces of equipment are expected to have a negligible salvage value at the end of ten years.

Management expects to sell the entire annual production of 400,000 units.

The companys cost of capital is 12 percent.

Required: In Excel, using differential cash flow, evaluate the desirability of purchasing the new equipment.

Present Equipment 400,000 $0.113 $15,000 New Equipment 400,000 $0.075 $27,000 Annual costs Overhead Depreciation (10% of asset's book value) . . . Other $72.000 $30.000