5-42 A North City must choose between two new snow-removal machines. The SuperBlower has a $70,000 first cost, a 20-year life, and an $8000 salvage value. At the end of 9 years, it will need a major overhaul costing $19,000. Annual maintenance and operating costs are $9000. The Sno- Mover will cost $50,000, has an expected life of 10 years, and has no salvage value. The annual maintenance and operating costs are expected to be $12,000. Using a 12% interest rate, which machine should be chosen?
5-42 A North City must choose between two new snow-removal machines. The SuperBlower has a $70,000 first cost, a 20-year life, and an $8000 salvage value. At the end of 9 years, it will need a major overhaul costing $19,000. Annual maintenance and operating costs are $9000. The Sno- Mover will cost $50,000, has an expected life of 10 years, and has no salvage value. The annual maintenance and operating costs are expected to be $12,000. Using a 12% interest rate, which machine should be chosen?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:5-42 A North City must choose between two new snow-removal machines. The SuperBlower has
a $70,000 first cost, a 20-year life, and an $8000 salvage value. At the end of 9 years, it will need
a major overhaul costing $19,000. Annual maintenance and operating costs are $9000. The Sno-
Mover will cost $50,000, has an expected life of 10 years, and has no salvage value. The annual
maintenance and operating costs are expected to be $12,000. Using a 12% interest rate, which
machine should be chosen?
Expert Solution
Step 1
We will use Net Present Value of cash outflows method to determine which project will be more profitable. The cash outflows will be discounted using the 12% discount rate given. Usually NPV is calculated as:-
Present value of cash inflows- present value of cash outflows.
But here only cash outflows are given, so we will calculate their present values less present value of any cash inflows, and whichever project has lesser result , that project will be accepted.
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