Bonds Ginormous Hats is interested in replacing its hat molder with a new improved model. The molder has a salvage value of $5,000 now and a zero salvage value of in five years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $8,000. The new machine costs $35,000 and has a predicted salvage value of $7,000 at the end of five years. The new machine will generate cash savings of $9,000 per year.

The company will have to invest $5,000 in specialized spare parts for the new machine as working capital. The working capital will be released at the end of five years for investment elsewhere.

Required:

1. What is the net present value of purchasing the new machine if the company has a required rate of return of 12 percent?

1. Should management replace the hat molder? Explain your response.

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Answer rating: 100% (QA)

PV factor for 12 at 5 years is 056742 PV factor for 12 at 1 year is 089285 PV facto... View the full answer