Interstate Manufacturing is considering either replacing one of its old machines
ID: 2500401 • Letter: I
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 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.
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.
Required:
Determine the net present Value of Alternative 1
Initial cash investment (net).....
i= 12%
2. Determine the net present value of alternative 2. ^^ Same Format as above
3.Which alternative should management select?
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.)
Explanation / Answer
Present Value = Cashflow / ((1 + i) ^ number of year)
NPV = Sum of the present values of all the cashflows.
The management should select the alternative with a higher NPV
Year Cashflow Interest Present Value NPV 0 -150000 12% -150000.00 60746.08 1 55000 12% 49107.14 2 55000 12% 43845.66 3 55000 12% 39147.91 4 55000 12% 34953.49 5 77000 12% 43691.87 Year Cashflow Interest Present Value NPV 0 -252000 12% -252000.00 -31374.23 1 59000 12% 52678.57 2 59000 12% 47034.44 3 59000 12% 41995.03 4 59000 12% 37495.57 5 73000 12% 41422.16Related Questions
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