What are the cash flows associated with keeping the old equipment and with replacing the old equipment? What are the resulting present values for both scenarios?

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Rossi estimated that the new sheeter would reduce waste in two ways. First, the waste produced by the old sheeter during sheeting was 3.8% and that would be lowered to about 2.4% with the new machine. Second, the sheeting process also affected waste in later (downstream) processes. Downstream waste for both internally and externally sheeted paper was currently 1.8%. The new sheeter would produce sheets that were far flatter than those produced by the old machine or purchased externally. This would improve sheet handling both in latter operations and reduce waste to somewhere between 0.8% and 1.6%. The net effect of the sheeter replacement on inventory was not entirely clear. Paper already sheeted would typically arrive four days before it was used. If the paper was bought in rolls, it would spend five days as a roll and then two days as sheets before being used. Thus, there would be an extra three days of physical inventory." However, the increase in inventory volume would be offset to some extent by the lower roll price. An important consideration for Pitts was how volumes and costs would evolve over time. He had seen substantial growth. In the future, he expected a minimum of 3% growth but would not be surprised to see growth of 7% or 8%. In either event, the unused capacity of the new sheeter would soon be employed. He estimated that all costs would increase by about 2% a year except paper. The cost of paper fluctuated widely and was an important source of uncertainty in his business. It would certainly matter in this analysis since the central motivation for the replacement was the cost of paper. Pitts believed that given decreasing demand, the cost of paper would be unchanged over the next five years. Rossi estimated that the new sheeter would reduce waste in two ways. First, the waste produced by the old sheeter during sheeting was 3.8% and that would be lowered to about 2.4% with the new machine. Second, the sheeting process also affected waste in later (downstream) processes. Downstream waste for both internally and externally sheeted paper was currently 1.8%. The new sheeter would produce sheets that were far flatter than those produced by the old machine or purchased externally. This would improve sheet handling both in latter operations and reduce waste to somewhere between 0.8% and 1.6%. The net effect of the sheeter replacement on inventory was not entirely clear. Paper already sheeted would typically arrive four days before it was used. If the paper was bought in rolls, it would spend five days as a roll and then two days as sheets before being used. Thus, there would be an extra three days of physical inventory." However, the increase in inventory volume would be offset to some extent by the lower roll price. An important consideration for Pitts was how volumes and costs would evolve over time. He had seen substantial growth. In the future, he expected a minimum of 3% growth but would not be surprised to see growth of 7% or 8%. In either event, the unused capacity of the new sheeter would soon be employed. He estimated that all costs would increase by about 2% a year except paper. The cost of paper fluctuated widely and was an important source of uncertainty in his business. It would certainly matter in this analysis since the central motivation for the replacement was the cost of paper. Pitts believed that given decreasing demand, the cost of paper would be unchanged over the next five years.

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According to scenario one may have business equipment for working up but comes up with a decision to replace the old one with a new one to improve on production This is the same decision facing Murry ... View the full answer