HIA 2.	MBA 582 Hand-in-assignment 2 - Summer 2018								Answer Sheet:
												Cash	PVF	Total
	Interstate Manufacturing (IM) is considering either replacing one of its old machines with a new machine										Period	Flow	@ 10%	PVF
	or having the old machine overhauled. Information about the two alternatives follows.										Yrs	US $		US $
								1	Alternative 1	Revenues	1-5	95,000	0.0000	$ -
	Management requires a 10% rate of return on its investments.-									Operating Costs	1-5	(42,000)	0.0000	$ -
										Salvage value	5	15,000	0.0000	$ -
				Machines						Sub-Total				$ -
				OLD		NEW				Cost of overhaul				$ (150,000)
				US $		US $				Net Present Value				$ (150,000)
	Cost			112,000		300,000			Is the cost of the old machine relevant?
	Cost of overhaul			150,000
	Annual revenues generated			95,000		100,000						Cash	PVF	Total
	Annual cash operating costs (after overhaul)			42,000		32,000					Period	Flow	@ 10%	PVF
											Yrs	US $		US $
	Salvage value - Old machine in 5 years time -			15,000				2	Alternative 1	Revenues	1-5	100,000	0.0000	$ -
	Salvage value of new machine in 5 years.					20,000				Operating Costs	1-5	(32,000)	0.0000	$ -
										Salvage value	5	20,000	0.0000	$ -
										Salvage value (old)				$ 29,000
	Alternative 1:	Keep OLD machine and have it overhauled. If the old machine is overhauled, it will								Sub-Total				$ 29,000
		be kept for another 5 years and then sold for ts salvage value.								Cost of new machine				$ (300,000)
										Net Present Value				$ (271,000)
	Alternative 2:	Sell the old machine and buy a new one. The new machine is more efficient and will yield							What about intangible benefits?
		substantial operating cost savings with more products being produced and sold.
	Required:							3	Recommendation:
	1	Determine the net present value of alternative 1
	2	Determine the net present value of alternative 2
	3	Comment on the Alternative 1 & 2 subsidiary questions briefly, and then make you