Assume that a company is choosing between two alternatives-keep an existing machine or replace it with a new machine. The costs associated with the two alternatives are summarized as follows: Purchase cost (new) Remaining book value $ 15,000 $ 22,000 $ 6,000 Overhaul needed now Annual cash operating costs Salvage value (now) Salvage value (eight years from now) $ 5,000 $ 10,500 $ 2,000 $7,000 $ 1,000 $ 6,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided If the company overhauls its existing machine, it will be usable for eight more years. If it buys the new machine, it will be used for eight years. Assuming a discount rate of 23%, what is the net present value of the cash flows associated with keeping the existing machine?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 17P
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Assume that a company is choosing between two alternatives-keep an existing machine or replace it with a new machine. The costs associated with the two alternatives are summarized as follows:
Purchase cost (new)
Remaining book value
$ 15,000
$ 22,000
$ 6,000
Overhaul needed now
Annual cash operating costs
Salvage value (now)
Salvage value (eight years from now)
$ 5,000
$ 10,500
$ 2,000
$7,000
$ 1,000
$ 6,000
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided
If the company overhauls its existing machine, it will be usable for eight more years. If it buys the new machine, it will be used for eight years. Assuming a discount rate of 23%, what is the net present
value of the cash flows associated with keeping the existing machine?
Transcribed Image Text:Assume that a company is choosing between two alternatives-keep an existing machine or replace it with a new machine. The costs associated with the two alternatives are summarized as follows: Purchase cost (new) Remaining book value $ 15,000 $ 22,000 $ 6,000 Overhaul needed now Annual cash operating costs Salvage value (now) Salvage value (eight years from now) $ 5,000 $ 10,500 $ 2,000 $7,000 $ 1,000 $ 6,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided If the company overhauls its existing machine, it will be usable for eight more years. If it buys the new machine, it will be used for eight years. Assuming a discount rate of 23%, what is the net present value of the cash flows associated with keeping the existing machine?
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