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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 (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	$	118,000
Cost of overhaul		158,000
Annual expected revenues generated		87,000
Annual cash operating costs after overhaul		41,000
Salvage value of old machine in 5 years		19,000

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	$	305,000
Salvage value of old machine now		49,000
Annual expected revenues generated		106,000
Annual cash operating costs		27,000
Salvage value of new machine in 5 years		12,000

Required: 1. Determine the net present value of alternative 1. $ 158,000 Initial cash investment (net) Chart values are based on: Year Table factor Present Value 10% Subsequent Cash inflow x (outflow) 46,000 x 46,000 x 46,000 x 46,000 x 65,000 x 3 5 Present value of cash inflows Present value of cash outflows Net present value $ 0 $ 305,000 Table factor Present Value $ 2. Determine the net present value of alternative 2. Initial cash investment (net) Subsequent Year Cash inflow X (outflow) 1 79,000 X 2 79,000 x 79,000 4 79,000 X 5 91,000 X Now Present value of cash inflows Present value of cash outflows Net present value 3. Which alternative should management select? Alternative 2

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