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.)

Purchase of net machine
Sale of old machine
Cash operating savings
Overhaul
Salvage value
Total
If the machinery should be acquired

Answer rating: 100% (QA)

Purchase of new machine 30900 Sale of old machine 3700 Cash operating savings 10300 Cash opera... View the full answer