Question

Problem 24-4A Computing net present value of alternate investments LO P3 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 12% rate of return on its investments. Use the (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Problem 24-4A Computing net present value of alternate investments LO P3 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 12% rate of return on its investments. Use the (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 $114,000 144,000 91,000 40,000 24,000 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 $296,000 38,000 116,000 23,000 14,000 Salvage value of old machine now Annual expected revenues generated Annual cash operating costs Salvage value of new machine in 5 years

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Answer 1

1) alternative 1
initial investment				144000
i				12%
Year	subsequent cash inflow	x	table factor =	present value
1	51000	x	0.8929	45537.9
2	51000	x	0.7972	40657.2
3	51000	x	0.7118	36301.8
4	51000	x	0.6355	32410.5
5	75000	x	0.5674	42555
	total present value			197462.4
	less: initial investment			144000
	net present value			53462.4
2) alternative -2
initial investment				258000
i				12%
Year	subsequent cash inflow	x	table factor =	present value
1	93000	x	0.8929	83039.7
2	93000	x	0.7972	74139.6
3	93000	x	0.7118	66197.4
4	93000	x	0.6355	59101.5
5	107000	x	0.5674	60711.8
	Total			343190
	less: initial investment			258000
	net present value			85190
b) alternative 2