Question

9:03 PM Q Aas Verizon ih : Required: Construct the text of an e-mail to Sara describing how the amount of the lump- sum settlement was determined. Include a calculation that might help Sara and John understand. Judgment Case 5-5 Replacement decision L05-3, L05-8 Hughes Corporation is considering replacing a machine used in the manufacturing process with a new, more efficient model. The purchase price of the new machine is $150,000 and the old machine can be sold for $100,000. Output for the two machines is identical; they will both be used to produce the same amount of product for five years. However, the annual operating costs of the old machine are $18,000 compared to $10,000 for the new machine. Also, the new machine has a salvage value of $25,000, but the old machine will be worthless at the end of the five years. You are deciding whether the company should sell the old machine and purchase the new model. You have determined that an 8% rate properly reflects the time value of money in this situation and that all operating costs are paid at the end of the year. For this initial comparison you ignore the effect of the decision on income taxes. Required: 1. What is the incremental cash outflow required to acquire the new machine? 2. What is the present value of the benefits of acquiring the new machine? n a baada loban lohncon

Answer 1

1. incremental cash outflow = new machine cost - sale value of old machine = 150000-100000 = 50000

Discounted Cash inglow Incremental suvine 1-5 PUAF (87) 3.9927 10000 25000 6o 6806 Cash online 39927 17015 $5 6942 NPV = NPV = Cash In low - ouf low 56942 - 50000 = $6942 Scanned with CamScanner