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1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which alternative should management select based on net present value?

1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which alternative should management select based on net present value?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 12% 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. This requires an initial investment of $158,000 and results in $42,000 of net cash flows in each of the next five years. After five years, it can be sold for a $20,000 salvage value. Alternative 2: Sell the old machine for $44,000 and buy a new one. The new machine requires an initial investment of $301,000 and can be sold for a $11,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $50,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which alternative should management select based on net present value? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Determine the net present value of alternative 1. (Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole dollar.) Year 1-5 Salvage value (year 5) Totals Initial investment Net present value Net Cash Flows Present Value Factors at 12% Present Value of Cash Flows < Required 1 Required 2 >
Transcribed Image Text:Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 12% 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. This requires an initial investment of $158,000 and results in $42,000 of net cash flows in each of the next five years. After five years, it can be sold for a $20,000 salvage value. Alternative 2: Sell the old machine for $44,000 and buy a new one. The new machine requires an initial investment of $301,000 and can be sold for a $11,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $50,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which alternative should management select based on net present value? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Determine the net present value of alternative 1. (Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole dollar.) Year 1-5 Salvage value (year 5) Totals Initial investment Net present value Net Cash Flows Present Value Factors at 12% Present Value of Cash Flows < Required 1 Required 2 >
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