Eastbay Hospital has an auxiliary generator that is used when power failures occur. The generator is worn out and must be either overhauled or replaced with a new generator. The hospital has assembled the following information:
|
Present
Generator |
New
Generator |
| Purchase cost |
$ |
16,000 |
|
$ |
20,000 |
|
| Remaining book value |
$ |
9,000 |
|
|
- |
|
| Overhaul needed now |
$ |
8,000 |
|
|
- |
|
| Annual cash operating costs |
$ |
12,500 |
|
$ |
7,500 |
|
| Salvage value-now |
$ |
4,000 |
|
|
- |
|
| Salvage value-eight years from now |
$ |
3,000 |
|
$ |
6,000 |
|
|
|
If the company keeps and overhauls its present generator, then the generator will be usable for eight more years. If a new generator is purchased, it will be used for eight years, after which it will be replaced. The new generator would be diesel-powered, resulting in a substantial reduction in annual operating costs, as shown above.
|
|
The hospital computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 16% discount rate. (Ignore income taxes.)
|
|
| Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. |
| 1a. |
Determine the net present value using the total-cost approach. (Negative amounts should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.)
|
|
Net Present Value |
| Purchase new generator |
$ |
| Overhaul and keep old generator |
$ |
|
| 1b. |
Should Eastbay Hospital keep the old generator or purchase the new one? |
|
|
|
|
Purchase the new generator |
|
Keep the old generator |
|
| 2. |
Using the incremental approach, determine the net present value in favor (or against) purchasing the new generator? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)
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The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a $41,000 machine that would reduce operating costs in its warehouse by $5,800 per year. At the end of the machine's 10-year useful life, it will have no scrap value. The company's required rate of return is 10%. (Ignore income taxes.)
|
|
|
Click here to view Exhibit 11B-2, to determine the appropriate discount factor(s) using table.
|
| Required: |
| 1. |
Determine the net present value of the investment in the machine. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)
|
| 2. |
What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?
|