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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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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