Problem 11-4A Computing net present value of alternate investments P3 Interstate

Question

Problem 11-4A Computing net present value of alternate investments 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 10% rate of return on its investments. 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. , $112.000 150,000 95,000 42,000 15,000 , , , .. 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 . $300,000 29,000 100,000 32,000 20,000

Explanation / Answer

Interstate should select Alternate 1

Item Period Cash flow Present Value Factor Present Value of Cash flow Revenue 1 to 5 95000 3.7908 360126 Operating Cost 1 to 5 -42000 3.7908 -159214 Salvage value 5 15000 0.6209 9314 Total 210226 Cost of Overhaul Now -150000 Net Present Value 60226

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