Clean Duds Laundromat has an industrial water softener that enhances the water quality used in its washing machines. The water softener is approaching the end of its useful life and must be either overhauled or replaced. Details of the two alternatives are shown below. If the company overhauls its current water softener, then it will be usable for eight more years. If, instead, a new water softener is purchased, it will be used for eight years, after which it will be replaced. The new water softener will be considerably more energy efficient, resulting in a substantial reduction in annual operating costs, as shown below: Current Water Softener $17,000 $13,500 $ 8,500 $10,500 $ 3,800 New Water Softener $ 23,500 $ 7,200 $ 1,900 $ 4,800 Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value now Salvage value eight years from now Clean Duds computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 14% discount rate. Required: (Ignore income taxes.) 1-a. Determine the present value of net cash flows using the total-cost approach. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Enter any cash outflows with a minus sign. Do not round intermediate calculations and round final answers to the nearest dollar amount.) Purchase the new softener Upgrade and Keep the old softener PV of Net Cash Flows
Clean Duds Laundromat has an industrial water softener that enhances the water quality used in its washing machines. The water softener is approaching the end of its useful life and must be either overhauled or replaced. Details of the two alternatives are shown below. If the company overhauls its current water softener, then it will be usable for eight more years. If, instead, a new water softener is purchased, it will be used for eight years, after which it will be replaced. The new water softener will be considerably more energy efficient, resulting in a substantial reduction in annual operating costs, as shown below: Current Water Softener $17,000 $13,500 $ 8,500 $10,500 $ 3,800 New Water Softener $ 23,500 $ 7,200 $ 1,900 $ 4,800 Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value now Salvage value eight years from now Clean Duds computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 14% discount rate. Required: (Ignore income taxes.) 1-a. Determine the present value of net cash flows using the total-cost approach. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Enter any cash outflows with a minus sign. Do not round intermediate calculations and round final answers to the nearest dollar amount.) Purchase the new softener Upgrade and Keep the old softener PV of Net Cash Flows
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Clean Duds Laundromat has an industrial water softener that enhances the water quality used in its washing machines. The water
softener is approaching the end of its useful life and must be either overhauled or replaced. Details of the two alternatives are shown
below.
If the company overhauls its current water softener, then it will be usable for eight more years. If, instead, a new water softener is
purchased, it will be used for eight years, after which it will be replaced. The new water softener will be considerably more energy
efficient, resulting in a substantial reduction in annual operating costs, as shown below:
Current
Water
Softener
$17,000
$13,500
$ 8,500
$10,500
$ 3,800
New
Water
Softener
$ 23,500
$ 7,200
$ 1,900
$ 4,800
Purchase cost new
Remaining book value
Overhaul needed now
Annual cash operating costs
Salvage value now
Salvage value eight years from now
Clean Duds computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 14% discount rate.
Required:
(Ignore income taxes.)
1-a. Determine the present value of net cash flows using the total-cost approach. (Hint: Use Microsoft Excel to calculate the discount
factor(s).) (Enter any cash outflows with a minus sign. Do not round intermediate calculations and round final answers to the
nearest dollar amount.)
Purchase the new softener
Upgrade and Keep the old softener
PV of Net
Cash Flows
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