Question
You are given the following present value factors at 12 percent, the Three-City Plastic Company's minimum desired rate of return. (14 points, 3 points sections
You are given the following present value factors at 12 percent, the Three-City Plastic Company's minimum desired rate of return. (14 points, 3 points sections a-d and 2 points section e)
Present Value Present Value of
End of Period of $1 an Annuity of $1
1 0.89286 0.89286
2 0.79719 1.69005
3 0.71178 2.40183
4 0.63552 3.03735
5 0.56743 3.60478
6 0.50663 4.11141
7 0.45235 4.56376
The Main Street Sanitation Corp is considering the replacement of a machine. The old machine has a book value of $155,000 and a remaining estimated life of four years, with no salvage value at that time. Currently it could be sold for $188,800. The new machine will cost $570,000, including transportation and installation. It has an estimated life of four years, with no salvage value then. Yearly cash operating costs for the old machine is $600,000 while the new machine is expected to cost $480,000 to run annually.
a. Compute the present value of the operating cash outflows for the old machine.
b. Compute the present value of the operating cash outflows for the new machine.
c. Compute the present value of the cash operating savings if the new machine is purchased.
d. What is the net present value of the replacement alternative (meaning the new machine)?
e. Should the equipment be purchased, why or why not (should be based on your work in d)?
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