Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a rate of return on its investments. PV of $ FV of $ PVA of $ and FVA of $
Note: Use appropriate factors from the tables provided.
Alternative : Keep the old machine and have it overhauled. This requires an initial investment of $ and results in $ of net cash flows in each of the next five years. After five years, it can be sold for a $ salvage value.
Alternative : Sell the old machine for $ and buy a new one. The new machine requires an initial investment of $ and can be sold for a $ salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $ in each of the next five years.
Required:
Determine the net present value of alternative
Determine the net present value of alternative
Which alternative should management select based on net present value?
