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. EV of $1. PVA of $1. and EVA 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 Cost of overhaul Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years 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 Salvage value of old machine now Annual expected revenues generated Annual cash operating costs Salvage value of new machine in 5 years Required: Year 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: i= 1 2 3 4 5 Year Subsequent Cash inflow (outflow) 1 $112,000 145,000 88,000 39,000 18,000 X Subsequent Cash inflow (outflow) $304,000 39,000 108,000 27,000 14,000 2. Determine the net present value of alternative 2. Initial cash investment (net) Table factor Table factor 11 = = $ Present Value Present Value 0
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. EV of $1. PVA of $1. and EVA 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 Cost of overhaul Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years 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 Salvage value of old machine now Annual expected revenues generated Annual cash operating costs Salvage value of new machine in 5 years Required: Year 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: i= 1 2 3 4 5 Year Subsequent Cash inflow (outflow) 1 $112,000 145,000 88,000 39,000 18,000 X Subsequent Cash inflow (outflow) $304,000 39,000 108,000 27,000 14,000 2. Determine the net present value of alternative 2. Initial cash investment (net) Table factor Table factor 11 = = $ Present Value Present Value 0
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1cM
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Transcribed Image Text: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. EV
of $1. PVA of $1. and EVA 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
Cost of overhaul
Annual expected revenues generated
Annual cash operating costs after overhaul
Salvage value of old machine in 5 years
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 eachine
Salvage value of old machine now
Annual expected revenues generated
Annual cash operating costs
Salvage value of new machine in 5 years
Required:
Year
1
2
1. Determine the net present value of alternative 1.
Initial cash investment (net)
Chart values are based on:
3
4
5
Year
Subsequent Cash
inflow (outflow)
1
2
$112,000
145,000
80,000
39,000
18,000
Subsequent Cash
inflow (outflow)
$304,000
39,000
108,000
2. Determine the net present value of alternative 2.
Initial cash investment (net)
X
27,000
14,000
Table factor
Table factor
=
=
=
$
Present Value
B Present Value
Transcribed Image Text:2. Determine the net present value of alternative 2.
Initial cash investment (net)
Year
1
2
3
4
5
Now
Subsequent Cash
inflow (outflow)
x
Table factor
3. Which alternative should management select?
11
=
11
H
11
11
$
(A
$
Present Value
0
0
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