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 12% 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. 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 $ 109,000 Cost of overhaul 154,000 Annual expected revenues generated 92,000 Annual cash operating costs after overhaul 40,000 Salvage value of old machine in 5 years 24,000 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 $ 300,000 Salvage value of old machine now 38,000 Annual expected revenues generated 106,000 Annual cash operating costs 32,000 Salvage value of new machine in 5 years
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 12% 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. 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 $ 109,000 Cost of overhaul 154,000 Annual expected revenues generated 92,000 Annual cash operating costs after overhaul 40,000 Salvage value of old machine in 5 years 24,000 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 $ 300,000 Salvage value of old machine now 38,000 Annual expected revenues generated 106,000 Annual cash operating costs 32,000 Salvage value of new machine in 5 years
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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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 12% rate of
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 | $ | 109,000 | |
| Cost of overhaul | 154,000 | ||
| Annual expected revenues generated | 92,000 | ||
| Annual cash operating costs after overhaul | 40,000 | ||
| Salvage value of old machine in 5 years | 24,000 | ||
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 | $ | 300,000 | |
| Salvage value of old machine now | 38,000 | ||
| Annual expected revenues generated | 106,000 | ||
| Annual cash operating costs | 32,000 | ||
| Salvage value of new machine in 5 years | 14,000 | ||
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Initial cash investment (net)
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Table factor
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Subsequent Cash
inflow (outflow)
Year
Table factor
Present Value
1.
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Transcribed Image Text:Homework Requlred i
2. Determine the net present value of alternative 2.
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Present Value
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