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 8% rate of return on its investments. (PV of $1. FV of $1. PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Alternative 1: Keep the old machine and have it overhauled. This requires an initial investment of $146,000 and results in $40,000 of net cash flows in each of the next five years. After five years, it can be sold for a $23,000 salvage value. Alternative 2: Sell the old machine for $40,000 and buy a new one. The new machine requires an initial investment of $295,000 and can be sold for a $11,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $49,000 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?
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 8% rate of return on its investments. (PV of $1. FV of $1. PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Alternative 1: Keep the old machine and have it overhauled. This requires an initial investment of $146,000 and results in $40,000 of net cash flows in each of the next five years. After five years, it can be sold for a $23,000 salvage value. Alternative 2: Sell the old machine for $40,000 and buy a new one. The new machine requires an initial investment of $295,000 and can be sold for a $11,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $49,000 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 8% rate of return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1)
(Use appropriate factor(s) from the tables provided.)
Alternative 1: Keep the old machine and have it overhauled. This requires an initial investment of $146,000 and results in $40,000 of
net cash flows in each of the next five years. After five years, it can be sold for a $23,000 salvage value.
Alternative 2: Sell the old machine for $40,000 and buy a new one. The new machine requires an initial investment of $295,000 and
can be sold for a $11,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of
$49,000 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
A
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