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P25-33. NPV Total and Differential Analysis of Replacement Decision Assume Mitsubishi Chemical is evaluating a...

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P25-33. NPV Total and Differential Analysis of Replacement Decision Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $200,000 and have a salvage value of $20,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $22.500, as follows: Salaries. Supplies Utilities Cleaning and maintenance. Total cash expenditures .. Old Compressor New Compressor $60,000 $75,000 12,000 7,500 23,000 15,000 35,000 10.000 $130,000 $107,500 If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $60,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $6,000. The old compressor's present book value is $85.000 If kept, the old compressor will require repairs one year from now predicted to cost $75,000. Required a. Use the total cost approach to evaluate the alternatives of keeping the old compressor and purchas- ing the new compressor. Indicate which alternative is preferred. b. Use the differential cost approach to evaluate the desirability of purchasing the new compressor

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