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Clark Creations is considering a proposal to sell an existing lathe and purchase a new...

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Accounting

  1. Clark Creations is considering a proposal to sell an existing lathe and purchase a new computer-operated lathe. Information on the existing lathe and the computer-operated lathe follow:

Existing lathe

Computer-operated lathe

Original Cost

$100,000

$300,000

Carrying Value

40,000

-

Fair Value now

20,000

-

Salvage value in 4 years

-

60,000

Annual cash operating costs

200,000

50,000

Remaining useful life

4 years

4 years

Assuming that the companys cost of capital is 10%, which is to be used in discounted cash flow analysis. Requirement:

  1. Compute the net present value of investing in the computer-operated lathe.

  1. Compute the profitability index of investing in the computer-operated lathe.

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