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Question: Save & ExitSubmit 6. value: 5.00 points Problem 11-4A Computing net present valu…

by | Sep 9, 2023 | Aswered Questions




Save
& ExitSubmit


6.

value:
5.00
points


Problem 11-4A Computing net present value of alternate investments
LO P3


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		 $ 112,000
  Cost of
overhaul		 150,000
  Annual expected
revenues generated		 95,000
  Annual cash
operating costs after overhaul		 42,000
  Salvage value of old
machine in 5 years		 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		 $ 300,000
  Salvage value of old
machine now		 29,000
  Annual expected
revenues generated		 100,000
  Annual cash
operating costs		 32,000
  Salvage value of new
machine in 5 years		 20,000


  

Required:


1. Determine the net present value of alternative 1.

Initial cash investment (net)
$150,000

Chart values are based on:

i =
10%

Year
Subsequent Cash inflow (outflow)
x
Table factor
=
Present Value

1
=

2
=

3
=

4
=

5
=

$0

2. Determine the net present value of alternative 2.

Initial cash investment (net)

Year
Subsequent Cash inflow (outflow)
x
Table factor
=
Present Value

1
=

2
=

3
=

4
  

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