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NPV Total and Differential Analysis of Replacement Decision Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $320,000 and have a salvage value of $32,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $36,000, as follows: Salaries Supplies Utilities Cleaning and maintenance Total cash expenditures Old Compressor New Compressor $96,000 $120,000 19,200 12,000 36,800 24,000 56,000 $208,000 16,000 $172,000 If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $96,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $9,600. The old compressor's present book value is $136,000. If kept, the old compressor will require repairs one year from now predicted to cost $120,000. 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: $ 0 Net present value of purchasing and operating new compressor: $ 0 Net savings of = $0 b. Use the differential cost approach to evaluate the desirability of purchasing the new compressor. Note: There may be slight differences between your answers in part a and part b due to rounding. Note: Round each of your answers below to the nearest whole dollar. Present Value Predicted of Cash Inflows (Outflows) Cash Flows Initial investment, net: $ 0 $ 0 Operations 0 0 Repairs on old 0 0 Disinvestment 0 0 Net present value of costs $ 0 Net savings of ÷ $0

NPV Total and Differential Analysis of Replacement Decision Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $320,000 and have a salvage value of $32,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $36,000, as follows: Salaries Supplies Utilities Cleaning and maintenance Total cash expenditures Old Compressor New Compressor $96,000 $120,000 19,200 12,000 36,800 24,000 56,000 $208,000 16,000 $172,000 If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $96,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $9,600. The old compressor's present book value is $136,000. If kept, the old compressor will require repairs one year from now predicted to cost $120,000. 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: $ 0 Net present value of purchasing and operating new compressor: $ 0 Net savings of = $0 b. Use the differential cost approach to evaluate the desirability of purchasing the new compressor. Note: There may be slight differences between your answers in part a and part b due to rounding. Note: Round each of your answers below to the nearest whole dollar. Present Value Predicted of Cash Inflows (Outflows) Cash Flows Initial investment, net: $ 0 $ 0 Operations 0 0 Repairs on old 0 0 Disinvestment 0 0 Net present value of costs $ 0 Net savings of ÷ $0

Managerial Accounting
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 18E
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NPV Total and Differential Analysis of Replacement Decision Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $320,000 and have a salvage value of $32,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $36,000, as follows: Salaries Supplies Utilities Cleaning and maintenance Total cash expenditures Old Compressor New Compressor $96,000 $120,000 19,200 12,000 36,800 24,000 56,000 $208,000 16,000 $172,000 If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $96,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $9,600. The old compressor's present book value is $136,000. If kept, the old compressor will require repairs one year from now predicted to cost $120,000. 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: $ 0 Net present value of purchasing and operating new compressor: $ 0 Net savings of = $0 b. Use the differential cost approach to evaluate the desirability of purchasing the new compressor. Note: There may be slight differences between your answers in part a and part b due to rounding. Note: Round each of your answers below to the nearest whole dollar. Present Value Predicted of Cash Inflows (Outflows) Cash Flows Initial investment, net: $ 0 $ 0 Operations 0 0 Repairs on old 0 0 Disinvestment 0 0 Net present value of costs $ 0 Net savings of ÷ $0
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 $320,000 and have a salvage value of $32,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $36,000, as follows: Salaries Supplies Utilities Cleaning and maintenance Total cash expenditures Old Compressor New Compressor $96,000 $120,000 19,200 12,000 36,800 24,000 56,000 $208,000 16,000 $172,000 If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $96,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $9,600. The old compressor's present book value is $136,000. If kept, the old compressor will require repairs one year from now predicted to cost $120,000. 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: $ 0 Net present value of purchasing and operating new compressor: $ 0 Net savings of = $0 b. Use the differential cost approach to evaluate the desirability of purchasing the new compressor. Note: There may be slight differences between your answers in part a and part b due to rounding. Note: Round each of your answers below to the nearest whole dollar. Present Value Predicted of Cash Inflows (Outflows) Cash Flows Initial investment, net: $ 0 $ 0 Operations 0 0 Repairs on old 0 0 Disinvestment 0 0 Net present value of costs $ 0 Net savings of ÷ $0
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