The present value of the annual cash

Question

Lichty Car Wash has some equipment that needs to be rebuilt or replaced. The following information has been gathered concerning this decision:

1. Present Equipment New Equipment
2. Purchase cost new $64,500 $59,000
3. Remaining book value $21,400
4. Cost to rebuild now $21,400
5. Major maintenance at the end of 3 years $5,700 $3,700
6. Annual cash operating costs $12,500 $9,100
7. Salvage value in 5 years $3,400 $10,200
8. Salvage value now $13,600

Lichty uses the total-cost approach and a discount rate of 12% in making capital budgeting decisions. Regardless of which option is chosen, rebuild or replace, at the end of four years Mr. Lichty plans to close the car wash and retire.

If the new equipment is purchased, the present value of the annual cash operating costs associated with this alternative is:
$(27,637)

$(38,874)

$(16,400)

$(17,311)