The supervisor of the county Department of Transportation (DOT) is considering t
ID: 341482 • Letter: T
Question
The supervisor of the county Department of Transportation (DOT) is considering the replacement of some machinery. This machinery has zero book value but its current market value is $890. One possible alternative is to invest in new machinery, which has a cost of $39,900. This new machinery would produce estimated annual operating cash savings of $12,950. The estimated useful life of the new machinery is four years. The DOT uses straight-line depreciation. The new machinery has an estimated salvage value of $2,090 at the end of four years. The investment in the new machinery would require an additional investment in working capital of $3,000, which would be recovered after four years.
If the DOT accepts this investment proposal, disposal of the old machinery and investment in the new equipment will take place on December 31, 20x1. The cash flows from the investment will occur during the calendar years 20x2 through 20x5.
Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)
Required:
Prepare a net-present-value analysis of the county DOT’s machinery replacement decision. The county has a 10 percent hurdle rate. (Round your "Discount factors" to 3 decimal places and final dollar amounts to whole dollars. Negative amounts should be indicated by a minus sign.)
Time 0 Time 1 Time 2 Time 3 Time 4 Acquistion cost Investment in working capital Recovery of working capital Salvage value of old machinery Salvage value of new machinery Annual operating cash savings Total cash flow Discount factor Present Value Net present valueExplanation / Answer
TIME0 TIME 1 TIME 2 TIME 3 TIME 4 Acquisition Cost -39900 Investment of working capital -3000 Recovery of working capital 3000 Salvage of old machinery 890 Salvage of new machinery 2090 Annual operating cost Savings 12950 12950 12950 12950 Total cash flow -42010 12950 12950 12950 18040 discount factor 1 0.909091 0.826446 0.751315 0.683013 Present value -42010 11772.73 10702.48 9729.527 12321.56 NPV 2516.29
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