WEEK THREE

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 12% rate of return on its investments. Use the (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	$104,000
Cost of overhaul	145,000
Annual expected revenues generated	105,000
Annual cash operating costs after overhaul	52,000
Salvage value of old machine in 5 years	21,000

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	$294,000
Salvage value of old machine now	33,000
Annual expected revenues generated	93,000
Annual cash operating costs	25,000
Salvage value of new machine in 5 years	13,000

1. Determine the net present value of alternative 1.
Initial cash investment (net)					$145,000
Chart values are based on:
i =	12%
Year	Subsequent Cash inflow (outflow)	x	Table factor	=	Present Value
1	$53,000	x	0.8929	=	47,324
2	53,000	x	0.7972	=	42,252
3	53,000	x	0.7118	=	37,725
4	53,000	x	0.6355	=	33,682
5				=
Present value of cash inflows
Present value of cash outflows
Net present value					$0
2. Determine the net present value of alternative 2.
Initial cash investment (net)					294,000
Year	Subsequent Cash inflow (outflow)	x	Table factor	=	Present Value
1	$68,000	x	0.8930	=	$60,724
2	68,000	x		=
3	68,000	x		=
4	68,000	x		=
5				=
Now
Present value of cash inflows
Present value of cash outflows
Net present value					$0
3. Which alternative should management select?
			Alternative 1

PLEASE ANSWER THE QUESTIONS CORRECTLY, FILL IN THE BLANKS AS NEEDED!!!