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: Purchase cost new Remaining book value. Overhaul needed now Annual cash operating costs Salvage value now Salvage value eight years from now Current Water Softener $25,000 $21,500 $12,500 $14,500 New Water Softener $35,500 $ 9,600 $ 5,400 $ 2,700 $ 6,400 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
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: Purchase cost new Remaining book value. Overhaul needed now Annual cash operating costs Salvage value now Salvage value eight years from now Current Water Softener $25,000 $21,500 $12,500 $14,500 New Water Softener $35,500 $ 9,600 $ 5,400 $ 2,700 $ 6,400 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
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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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:
Purchase cost new
Remaining book value.
Overhaul needed now
Annual cash operating costs
Salvage value now
Salvage value eight years from now.
Purchase the new softener
Upgrade and Keep the old softener
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.)
O Purchase the new softener
O Upgrade the old softener
Current
Water
Softener
$25,000
$21,500
$12,500
$14,500
$ 5,400
$ 2,700
PV of Net
Cash Flows
New
Water
Softener
$35,500
Net present value
$ 9,600
$ 6,400
1-b. Should Clean Duds Laundromat upgrade the old water softener or purchase the new one?
2. Using the incremental-cost approach, determine the net present value in favor of (or against) purchasing the new water softener?
(Hint. Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and round final answer to the
nearest dollar amount.)
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