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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 $107,000 Cost of overhaul 155,000 Annual expected revenues generated 111,000 Annual cash operating costs after overhaul 37,000 Salvage value of old machine in 5 years 21,000 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 $294,000 Salvage value of old machine now 41,000 Annual expected revenues generated 92,000 Annual cash operating costs 31,000 Salvage value of new machine in 5 years 11,000 Required: 1. Determine the net present value of alternative 1. Initial cash investment (net) Chart values are based on: i = Year Subsequent Cash inflow (outflow) x Table factor = Present Value 1 = 2 = 3 = 4 = 5 = 2. Determine the net present value of alternative 2. Initial cash investment (net) Year Subsequent Cash inflow (outflow) x Table factor = Present Value 1 = 2 = 3 = 4 = 5 = Now 3. Which alternative should management select?

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