Tire Company needs to overhaul its auto lift system or purchase a new one. The facts have been gathered, and they are as follows:

Which alternative is the most desirable with a current required rate of return of 18%?

Show computations, and assume no taxes.

Current Machine New Machine

Purchase price, new. $124,750 $169,800

Current book value. 36,600

Overhaul needed now 30,000

Annual cash operating costs 69,700 58,800

Current salvage value 50,000

Salvage value in 6 years 8,900 34,500

Begin by selecting the formula to calculate the present value (PV) for the annual operating costs. Then, calculate the PV of the operating costs for both the current machine and the new machine.

Formula. ________ x ______ = PV of cash operating cost

Current Machine _______ x _______ = _______

New Machine ________ x ________ = _______