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# Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires

## Interstate Manufacturing is considering either overhauling an old machine or replacing it with a new machine. Information about the two alternatives follows. Management requires a 10% rate of return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Alternative 1: Keep the old machine and have it overhauled. This requires an initial investment of $151,000 and results in $46,000 of net cash flows in each of the next five years. After five years, it can be sold for a $21,000 salvage value. Alternative 2: Sell the old machine for $41,000 and buy a new one. The new machine requires an initial investment of $304,000 and can be sold for a $13,000 salvage value in five years. It would yield cost savings and higher sales, resulting in net cash flows of $56,000 in each of the next five years. Required: 1. Determine the net present value of alternative 1. 2. Determine the net present value of alternative 2. 3. Which alternative should management select based on net present value? Required 1 Required 2 Required 3 Determine the net present value of alternative 1. Note: Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole dollar. Year 1-5 Salvage value (year 5) Totals Initial investment Net present value Net Cash Flows Present Value Factors at 10% Present Value of Cash Flows $ 46,000 21,000 0 151,000 < Required 1 Required 2 > Required 1 Required 2 Required 3 Determine the net present value of alternative 2. Note: Negative net present values should be indicated with a minus sign. Do not round intermediate calculations. Round your present value factor to 4 decimals and final answers to the nearest whole dollar. Net Cash Flows Present Value Factors at 10% Present Value of Cash Flows Year 1-5 $ 56,000 Salvage value-new machine 13,000 Salvage value-old machine 41,000 1.0000 Totals Initial investment Net present value 304,000 < Required 1 Required 3 > Required 1 Required 2 Required 3 Which alternative should management select based on net present value? Management should select < Required 2 Required 3 >

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