Existing Machine New Machine Purchase cost (new) $ 15,000 $ 26,000 Remaining book value $ 6,000 Overhaul needed now $ 5,000 Annual cash operating costs $ 11,500 $ 7,000 Salvage value (now) $ 2,000 Salvage value (eight years from now) $ 1,000 $ 6,000 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. Based on a net present value analysis with a discount rate of 14%, what is the financial advantage (disadvantage) of replacing the existing machine with a new machine?
Existing Machine New Machine Purchase cost (new) $ 15,000 $ 26,000 Remaining book value $ 6,000 Overhaul needed now $ 5,000 Annual cash operating costs $ 11,500 $ 7,000 Salvage value (now) $ 2,000 Salvage value (eight years from now) $ 1,000 $ 6,000 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. Based on a net present value analysis with a discount rate of 14%, what is the financial advantage (disadvantage) of replacing the existing machine with a new machine?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Assume that a company is choosing between two alternatives—keep an existing machine or replace it with a machine. The costs associated with the two alternatives are summarized as follows:
| Existing Machine | New Machine | |
|---|---|---|
| Purchase cost (new) | $ 15,000 | $ 26,000 |
| Remaining book value | $ 6,000 | |
| Overhaul needed now | $ 5,000 | |
| Annual cash operating costs | $ 11,500 | $ 7,000 |
| Salvage value (now) | $ 2,000 | |
| Salvage value (eight years from now) | $ 1,000 | $ 6,000 |
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. Based on a
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