Randi Corp. is considering the replacement of some machinery that has zero book value and a current
Question:
Randi Corp. is considering the replacement of some machinery that has zero book value and a current market value of $3,700. One possible alternative is to invest in new machinery that costs $30,900. The new equipment has a 5-year service life and an estimated salvage value of $4,400, will produce annual cash operating savings of $10,300, and will require a $3,100 overhaul in year 3. The company uses straight-line depreciation.
Year | FV of $1 at 10% | FV of an ordinary annuity at 10% | PV of $1 at 10% | PV of an ordinary annuity at 10% | |||||||||||
1 | 1.100 | 1.000 | 0.909 | 0.909 | |||||||||||
2 | 1.210 | 2.100 | 0.826 | 1.736 | |||||||||||
3 | 1.331 | 3.310 | 0.751 | 2.487 | |||||||||||
4 | 1.464 | 4.641 | 0.683 | 3.170 | |||||||||||
5 | 1.611 | 6.105 | 0.621 | 3.791 | |||||||||||
6 | 1.772 | 7.716 | 0.564 | 4.355 | |||||||||||
Required:
Prepare a net-present-value analysis of Randi’s replacement decision, assuming an 10% hurdle rate and no income taxes. Should the machinery be acquired? (Negative amounts should be indicated by a minus sign. Round calculations to the nearest dollar.)
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Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins