Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (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. This requires an initial investment of $150,000 and results in $60,000 of net cash flows in each of the next five years. After five years, it can be sold for a $20,000 salvage value. Alternative 2: Sell the old machine for $50,000 and buy a new one. The new machine requires an initial investment of $300,000 and can be sold for a $20,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $60,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2.

Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (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. This requires an initial investment of $150,000 and results in $60,000 of net cash flows in each of the next five years. After five years, it can be sold for a $20,000 salvage value. Alternative 2: Sell the old machine for $50,000 and buy a new one. The new machine requires an initial investment of $300,000 and can be sold for a $20,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $60,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 15E: Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided...

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Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1, FV of $1. PVA of $1. and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Alternative 1: Keep the old machine and have it overhauled. This requires an initial investment of $154,000 and results in $52,000 of net cash flows in each of the next five years. After five years, it can be sold for a $20,000 salvage value. Alternative 2: Sell the old machine for $41,000 and buy a new one. The new machine requires an initial investment of $291,000 and can be sold for a $12,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $43,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which…
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. (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 $ 109,000 Cost of overhaul 154,000 Annual expected revenues generated 92,000 Annual cash operating costs after overhaul 40,000 Salvage value of old machine in 5 years 24,000 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 $ 300,000 Salvage…
Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 12% rate of return on its investments. (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. This requires an initial investment of $158,000 and results in $42,000 of net cash flows in each of the next five years. After five years, it can be sold for a $20,000 salvage value. Alternative 2: Sell the old machine for $44,000 and buy a new one. The new machine requires an initial investment of $301,000 and can be sold for a $11,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $50,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which…
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OptiLux is considering investing in an automated manufacturing system. The system requires an initial investment of $5.8 million, has a 20-year life, and will have zero salvage value. If the system is implemented, the company will save $760,000 per year in direct labor costs. The company requires a 10% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) a. Compute the proposed investment's net present value. b. Using the answer from part a, is the investment's internal rate of return higher or lower than 10%? Complete this question by entering your answers in the tabs below. Required A Required B Compute the proposed investment's net present value. Net present value $ 0 Required A Required B >
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