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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.. Annual expected revenues generated. Annual cash operating costs after overhaul. 150,000 95,000 42,000 Salvage value of old machlne In 5 years 15,000 Altenative 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. 2. Determine the net present value of alternative 2. 3. Which alternative do you recommend that management select?

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.. Annual expected revenues generated. Annual cash operating costs after overhaul. 150,000 95,000 42,000 Salvage value of old machlne In 5 years 15,000 Altenative 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. 2. Determine the net present value of alternative 2. 3. Which alternative do you recommend that management select?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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.

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.. Annual expected revenues generated. Annual cash operating costs after overhaul. 150,000 95,000 42,000 Salvage value of old machlne In 5 years 15,000 Altenative 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. 2. Determine the net present value of alternative 2. 3. Which alternative do you recommend that management select?
Transcribed Image Text: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.. Annual expected revenues generated. Annual cash operating costs after overhaul. 150,000 95,000 42,000 Salvage value of old machlne In 5 years 15,000 Altenative 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. 2. Determine the net present value of alternative 2. 3. Which alternative do you recommend that management select?
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