Assume that a company is choosing between two alternatives—keep an existing machine or replace it with a machine. The costs associated with the two alternatives are summarized as follows: Existing MachineNew MachinePurchase cost (new)$ 15,000$ 26,000Remaining book value$ 6,000 Overhaul needed now$ 5,000 Annual cash operating costs$ 11,500$ 7,000Salvage value (now)$ 2,000 Salvage value (eight years from now)$ 1,000$ 6,000If the company overhauls its existing machine, it will be usable for eight more years. If it buys the new machine, it will be used for eight years. Based on a net present value analysis with a discount rate of 14%, what is the financial advantage (disadvantage) of replacing the existing machine with a new machine?

To calculate the financial advantage of replacing the existing machine with a new machine, we shall…

Answered: Existing Machine New Machine Purchase…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 18P: Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting...

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Assume that a company is choosing between two alternatives—keep an existing machine or replace it with a machine. The costs associated with the two alternatives are summarized as follows:

	Existing Machine	New Machine
Purchase cost (new)	$ 15,000	$ 26,000
Remaining book value	$ 6,000
Overhaul needed now	$ 5,000
Annual cash operating costs	$ 11,500	$ 7,000
Salvage value (now)	$ 2,000
Salvage value (eight years from now)	$ 1,000	$ 6,000

If the company overhauls its existing machine, it will be usable for eight more years. If it buys the new machine, it will be used for eight years. Based on a net present value analysis with a discount rate of 14%, what is the financial advantage (disadvantage) of replacing the existing machine with a new machine?

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