Clean Duds Laundromat has an industrial water softener that enhances the water quality used in its washing
Clean Duds Laundromat has an industrial water softener that enhances the water quality used in its washing machines. The water softener is approaching the end of its useful life and must be either overhauled or replaced. Details of the two alternatives are shown below. If the company overhauls its current water softener, then it will be usable for eight more years. If, instead, a new water softener is purchased, it will be used for eight years, after which it will be replaced. The new water softener will be considerably more energy efficient, resulting in a substantial reduction in annual operating costs, as shown below:
Clean Duds computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 12% discount rate.
Ignore income taxes.
1. Should Clean Duds Laundromat upgrade the old water softener or purchase the new one? Use the total-cost approach to net present value in making your decision.
2. Redo (1) above, this time using the incremental-cost approach.
Net Present Value What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
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Current Water Softener Water Softener New Purchase cost new... $8,000 $4,500 $4000 $6,000 $2,000 $1000 $10,000 Remaining book value. Overhaul needed now. Annual cash operating costs Salvage value now..... Salvage value eight years from now. $ 4,500 $ 3,000
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1 The total cost approach Year s Amount of Cash Flows Present Value of Cash Flows Purchase the new w…View the full answer
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