Your company is considering the replacement of a piece of equipment. The old equipment has a book value of $8,000 and a remaining estimated life of six years, with no salvage value at that time. Present salvage value is $2,500.The new equipment will cost $12,000, including transportation and installation. It has an estimated life of six years, with no salvage value.Annual cash operating costs are $4,000 for the old machine and $1,600 annually for the new machine.

1) Compute the present value of the operating cash outflows for the old machine.

2) Compute the present value of the operating cash outflows for the new machine.

3) Compute the present value of the cash operating savings if the new machine is purchased.

4) What is the net present value of the replacement alternative (remember that the salvage would lower your cost when considering whether to purchase the new piece of equipment)?

5) Should the equipment be purchased? Why or why not?

Period Present Value of an Annuity of $1 1 2 3 Present Value of $1 0.926 0.857 0.794 0.735 0.681 0.630 0.926 1.783 2.577 3.312 3.993 4.623 4. 6