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 5 Cost of old machine Cost of overhaul Annual expected revenues generated Annual cash operating costs after over haul Salvage value of old machine in 5 years $115,000 146,000 92,000 41,000 18,000 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 $301,000 2 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. 2.5 Joints 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 $301,000 48,000 118,000 24,000 12,000 Required: Answer is not complete. 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: 1 10% & Answer is not complete. 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: 10% Subsequent Year Cash inflow (outflow) 1 $ 51,000 X 2 51.000 3 51,000 51,000 X 5 18,000 Table factor Present Value 4 ## Prey 2 of 4 Present value of cash inflows Present value of cash outflows Net present value 5 0 2. Determine the net present value of alternative 2. Initial cash investment (net) Subsequent Year Cash Inflow (outflow) 1 X Table factor Present Value = 2 3 4 5 Now Initial cash investment (net) Year Subsequent Cash inflow (outflow) Table factor Present Value 1 2 3 # ### 4 5 Now Present value of cash inflows Present value of cash outflows Net present value 3. Which alternative should management select? 0 Alternative 2