Question

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, 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	$	108,000
Cost of overhaul		156,000
Annual expected revenues generated		93,000
Annual cash operating costs after overhaul		37,000
Salvage value of old machine in 5 years		17,000

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	$	296,000
Salvage value of old machine now		45,000
Annual expected revenues generated		107,000
Annual cash operating costs		25,000
Salvage value of new machine in 5 years		11,000

Answer 1