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Interstate Manufacturing is considering either replacing one of its old machines with a new machine or having the old machine overhauled. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1. EV of $1. PVA of $1. and EVA of $1) (Use appropriate factor(s) from the tables provided.) Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value. Cost of old machine Cost of overhaul Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold. Cost of new machine Salvage value of old machine now Annual expected revenues generated Annual cash operating costs Salvage value of new machine in 5 years Required: Year 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: i= 1 2 3 4 5 Year Subsequent Cash inflow (outflow) 1 $112,000 145,000 88,000 39,000 18,000 X Subsequent Cash inflow (outflow) $304,000 39,000 108,000 27,000 14,000 2. Determine the net present value of alternative 2. Initial cash investment (net) Table factor Table factor 11 = = $ Present Value Present Value 0

Interstate Manufacturing is considering either replacing one of its old machines with a new machine or having the old machine overhauled. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1. EV of $1. PVA of $1. and EVA of $1) (Use appropriate factor(s) from the tables provided.) Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value. Cost of old machine Cost of overhaul Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold. Cost of new machine Salvage value of old machine now Annual expected revenues generated Annual cash operating costs Salvage value of new machine in 5 years Required: Year 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: i= 1 2 3 4 5 Year Subsequent Cash inflow (outflow) 1 $112,000 145,000 88,000 39,000 18,000 X Subsequent Cash inflow (outflow) $304,000 39,000 108,000 27,000 14,000 2. Determine the net present value of alternative 2. Initial cash investment (net) Table factor Table factor 11 = = $ Present Value Present Value 0

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Interstate Manufacturing is considering either replacing one of its old machines with a new machine or having the old machine overhauled. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1. EV of $1. PVA of $1. and EVA of $1) (Use appropriate factor(s) from the tables provided.) Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value. Cost of old machine Cost of overhaul Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold. Cost of new eachine Salvage value of old machine now Annual expected revenues generated Annual cash operating costs Salvage value of new machine in 5 years Required: Year 1 2 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: 3 4 5 Year Subsequent Cash inflow (outflow) 1 2 $112,000 145,000 80,000 39,000 18,000 Subsequent Cash inflow (outflow) $304,000 39,000 108,000 2. Determine the net present value of alternative 2. Initial cash investment (net) X 27,000 14,000 Table factor Table factor = = = $ Present Value B Present Value
Transcribed Image Text:Interstate Manufacturing is considering either replacing one of its old machines with a new machine or having the old machine overhauled. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1. EV of $1. PVA of $1. and EVA of $1) (Use appropriate factor(s) from the tables provided.) Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value. Cost of old machine Cost of overhaul Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years Alternative 2: Sell the old machine and buy a new one. The new machine is more efficient and will yield substantial operating cost savings with more product being produced and sold. Cost of new eachine Salvage value of old machine now Annual expected revenues generated Annual cash operating costs Salvage value of new machine in 5 years Required: Year 1 2 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: 3 4 5 Year Subsequent Cash inflow (outflow) 1 2 $112,000 145,000 80,000 39,000 18,000 Subsequent Cash inflow (outflow) $304,000 39,000 108,000 2. Determine the net present value of alternative 2. Initial cash investment (net) X 27,000 14,000 Table factor Table factor = = = $ Present Value B Present Value
2. Determine the net present value of alternative 2. Initial cash investment (net) Year 1 2 3 4 5 Now Subsequent Cash inflow (outflow) x Table factor 3. Which alternative should management select? 11 = 11 H 11 11 $ (A $ Present Value 0 0
Transcribed Image Text:2. Determine the net present value of alternative 2. Initial cash investment (net) Year 1 2 3 4 5 Now Subsequent Cash inflow (outflow) x Table factor 3. Which alternative should management select? 11 = 11 H 11 11 $ (A $ Present Value 0 0
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