NPV Total and Differential Analysis of Replacement Decision Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $400,000 and have a salvage value of $40,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $45,000, as follows: Old Compressor New Compressor Salaries $120.000 $150.000 Supplies 24.000 15.000 Utilities 46.000 30.000 Cleaning and maintenance 70.000 20.000 Total cash expenditures $260.000 $215.000 If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $120,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $12,000. The old compressor's present book value is $170,000. If kept, the old compressor will require repairs one year from now predicted to cost $150,000. Required a. Use the total cost approach to evaluate the alternatives of keeping the old compressor and purchasing the new compressor. Indicate which alternative is preferred. Hint: Use a negative sign to indicate a negative net present value. Net present value of operating costs of keeping old compressor: $ 1,094,913.34 Net present value of purchasing and operating new compressor: $ 1,084,928.61
NPV Total and Differential Analysis of Replacement Decision Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $400,000 and have a salvage value of $40,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $45,000, as follows: Old Compressor New Compressor Salaries $120.000 $150.000 Supplies 24.000 15.000 Utilities 46.000 30.000 Cleaning and maintenance 70.000 20.000 Total cash expenditures $260.000 $215.000 If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $120,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $12,000. The old compressor's present book value is $170,000. If kept, the old compressor will require repairs one year from now predicted to cost $150,000. Required a. Use the total cost approach to evaluate the alternatives of keeping the old compressor and purchasing the new compressor. Indicate which alternative is preferred. Hint: Use a negative sign to indicate a negative net present value. Net present value of operating costs of keeping old compressor: $ 1,094,913.34 Net present value of purchasing and operating new compressor: $ 1,084,928.61
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
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Transcribed Image Text:NPV Total and Differential Analysis of Replacement Decision
Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $400,000 and have a salvage value of $40,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash
savings of $45,000, as follows:
Old Compressor New Compressor
Salaries
$120,000
$150,000
Supplies
24,000
15,000
Utilities
46,000
30,000
Cleaning and maintenance
70,000
20,000
Total cash expenditures
$260,000
$215,000
If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $120,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value
of $12,000. The old compressor's present book value is $170,000. If kept, the old compressor will require repairs one year from now predicted to cost $150,000.
Required
a. Use the total cost approach to evaluate the alternatives of keeping the old compressor and purchasing the new compressor. Indicate which alternative is preferred.
Hint: Use a negative sign to indicate a negative net present value.
Net present value of operating costs of keeping old comp
or: $ 1,094,913.34
Net present value of purchasing and operating new compressor: $ 1,084,928.61
Net savings of purchasing new compressor +
9,984.73
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