Required 1 Required 2 Required 3 Determine the net present value of alternative 1. Note: Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole dollar. Year 1-5 Salvage value (year 5) Totals Initial investment Net present value Net Cash Flows Present Value Factors at 10% Present Value of Cash Flows Required 1 Required 2 Required 3 0 Determine the net present value of alternative 2. Note: Negative net present values should be indicated with a minus sign. Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole dollar. Year 1-5 Salvage value-new machine Salvage value-old machine Totals Initial investment Net present value Net Cash Flows Present Value Factors at 10% Present Value of Cash Flows 1.0000 0 Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Alternative 1: Keep the old machine and have it overhauled. This requires an initial investment of $152,000 and results in $54,000 of net cash flows in each of the next five years. After five years, it can be sold for a $16,000 salvage value. Alternative 2: Sell the old machine for $37,000 and buy a new one. The new machine requires an initial investment of $300,000 and can be sold for a $12,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $43,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which alternative should management select based on net present value?
Required 1 Required 2 Required 3 Determine the net present value of alternative 1. Note: Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole dollar. Year 1-5 Salvage value (year 5) Totals Initial investment Net present value Net Cash Flows Present Value Factors at 10% Present Value of Cash Flows Required 1 Required 2 Required 3 0 Determine the net present value of alternative 2. Note: Negative net present values should be indicated with a minus sign. Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole dollar. Year 1-5 Salvage value-new machine Salvage value-old machine Totals Initial investment Net present value Net Cash Flows Present Value Factors at 10% Present Value of Cash Flows 1.0000 0 Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Alternative 1: Keep the old machine and have it overhauled. This requires an initial investment of $152,000 and results in $54,000 of net cash flows in each of the next five years. After five years, it can be sold for a $16,000 salvage value. Alternative 2: Sell the old machine for $37,000 and buy a new one. The new machine requires an initial investment of $300,000 and can be sold for a $12,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $43,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which alternative should management select based on net present value?
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...
Related questions
Question
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning