2|Randi Corp. is considering the replacement of some machinery that has zero book value and acurrent market value of $3,800. One possible alternative is to invest in new machinery that costs$31,000. The new equipment has a four-year service life and an estimated salvage value of $4,500,will produce annual cash operating savings of $10,400, and will require a $3,200 overhaul in year 3.The company uses straight-line depreciation.FV of $1 at8%PV of $1 at8%FV of an ordinary annuity at8%1.0002.0803.2464.506PV of an ordinary annuity at8%0.9261.7832.5773.3123.993Year11.0800.9262341.1661.2600.8570.7941.3601.4691.5870.7350.6810.6305.8677.3364.623Required:Prepare a net-present-value analysis of Randi's replacement decision, assuming a(n) 8% hurdle rateand no income taxes. Should the machinery be acquired? (Negative amounts should be indicatedby a minus sign. Round your final answers to the nearest dollar.)

· Time value of money states that the value of money decreases over time. · The present value of a future cash flow amount is less than the future $ value. · Present value is calculated using a discounting factor rate. · Net present Value (NPV) is the excess of present value of cash flows over the initial invested cash outflow. >Requirement asked Purchase of new machine ($31,000) Sale of Old machine $3,800 Cash operating savings $34,445 [$10400 x 3.312, the PVA of $1 at 8% for 4th period] Overhaul ($2,541) [$3200 x 0.794, the PV of $1 at 8% for 3rd period] Salvage Value $3,308 [$4500 x 0.735, the PV of $1 at 8% for 4th period] Total $8,012 If machinery should be acquired YES >The ‘total’, which is basically the NPV, is positive which suggest that rate of return being earned is more than 8%.

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2| Randi Corp. is considering the replacement of some machinery that has zero book value and a current market value of $3,800. One possible alternative is to invest in new machinery that costs $31,000. The new equipment has a four-year service life and an estimated salvage value of $4,500, will produce annual cash operating savings of $10,400, and will require a $3,200 overhaul in year 3. The company uses straight-line depreciation. FV of $1 at 8% 1.080 1.166 1.260 1.360 1.469 FV of an ordinary annuity at 8% 1.000 2.080 3.246 4.506 5.867 7.336 PV of $1 at 8% 0.926 0.857 PV of an ordinary annuity at 8% 0.926 Year 1.783 0.794 2.577 0.735 0.681 0.630 3.312 3.993 4.623 6 1.587 Required: Prepare a net-present-value analysis of Randi's replacement decision, assuming a(n) 8% hurdle rate and no income taxes. Should the machinery be acquired? (Negative amounts should be indicated by a minus sign. Round your final answers to the nearest dollar.) 123456

2| Randi Corp. is considering the replacement of some machinery that has zero book value and a current market value of $3,800. One possible alternative is to invest in new machinery that costs $31,000. The new equipment has a four-year service life and an estimated salvage value of $4,500, will produce annual cash operating savings of $10,400, and will require a $3,200 overhaul in year 3. The company uses straight-line depreciation. FV of $1 at 8% 1.080 1.166 1.260 1.360 1.469 FV of an ordinary annuity at 8% 1.000 2.080 3.246 4.506 5.867 7.336 PV of $1 at 8% 0.926 0.857 PV of an ordinary annuity at 8% 0.926 Year 1.783 0.794 2.577 0.735 0.681 0.630 3.312 3.993 4.623 6 1.587 Required: Prepare a net-present-value analysis of Randi's replacement decision, assuming a(n) 8% hurdle rate and no income taxes. Should the machinery be acquired? (Negative amounts should be indicated by a minus sign. Round your final answers to the nearest dollar.) 123456

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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