Example No$.14$

XYZ Manufacturing is considering replacing a broken metal cutting machine. Several options have been proposed.

Option $1$: The broken machine can be sold today for $$3,000.$

Option $2$: It can be overhauled completely for $$7,000,$ after which it will produce $$2,500$ in annual cash flows over the next five years. The resale value of the asset at the end of five years is zero.

Option $3$: It can be replaced for $$18,000.$ The life of the replacement machine is five years, and it has an estimated salvage value of $$2,000$ at the end of five years. The anticipated operating cash inflows for each year will be $$5,000.$

If the firm's required rate of return of $12\%,$ what should $xYZ$ do$?$

Use: Cash Flow Approach

Answer: $NP{W}_1=$$$3,000$

$NP{W}_2=$$$2011\mathrm{.}94,NP{W}_3$

$4158\mathrm{.}78$

Choose Option $3$