Question

Problem 11-4A Computing net present value of alternate investments LO 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. Use the (PVors1. Ey of $1. Eva ofs1, and EVA of $1) (Use appropriate factorís) 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 Cost of overhaul Annual expected revenues generated Annual cash operating costs after overhaul Salvage value of old machine in 5 years $119,000 143,000 106,000 37,000 17,000 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 napeo 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 $308,000 41,000 91 ,000 30,000 9,000 Required: 1. Determine the net present value of alternative 1. Protein Synthesis...pptx

Answer 1

Alternative-1
Chart value
I = 10%
Year	Subsequent		PVF	Present values
	Cash flows
1	69000		0.909091	62727.27
2	69000		0.826446	57024.79
3	69000		0.751315	51840.72
4	69000		0.683013	47127.93
5	86000		0.620921	53399.23
	Present value of inflows			272120
	Less: Overhauling cost			143000
	Net present value			129120
Alternative-2
Chart value
I = 10%
Year	Subsequent		PVF	Present values
	Cash flows
1	61000		0.909091	55454.55
2	61000		0.826446	50413.22
3	61000		0.751315	45830.2
4	61000		0.683013	41663.82
5	70000		0.620921	43464.49
	Present value of inflows			236826
	Less: Net initial Investment			267000
	Net present value			-30174
Decision: Management Shall choose Alternative-1, Overhauling the existing machine