Interstate Manufacturing is considering either replacing one of its old machines with a new machine or having the old machine overhauled. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value. Cost of old machine Cost of overhaul Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years $112,000 150,000 95,000 42,000 15,000 Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold. Cost of new machine Salvage value of old machine now Annual expected revenues generated Annual cash operating costs Salvage value of new machine in 5 years $300,000 29,000 100,000 32,000 20,000 Answer is complete but not entirely correct. 1. Determine the net present value of alternative 1. Initial cash investment (net) 150,000 Table factor Present Value Chart values are based on: 10% Subsequent Year Cash inflow (outflow) 1 $ 53,000 2 53,000 3 53,000 4 53,000 5 68,000 X 0.9091 = 0.8265 = 0.7513 = 48,182 43,805 39,819 36,199 42,221 0.6830 = 0.6209 $ 210,226 $ Present value of cash inflows Present value of cash outflows Net present value 210,226 150,000 60,226 $ Table factor Present Value 2. Determine the net present value of alternative 2. Initial cash investment (net) Subsequent Year Cash inflow (outflow) 1 $ 68,000 2 68,000 x 3 68,000x 4 68,000 5 88,000 0.9091 = $ 0.8265 = 0.7513 = 0.6830 0.6209 61,819 56,202 51,088 46,444 54,639 0 X 270,192 Now EA $ 270,192 0 Present value of cash inflows Present value of cash outflows Net present value 3. Which alternative should management select? Management should select: Alterative 1 $ 270,192