A Manufacturing Company Is Considering Replacing a Broken Metal Cutting

question 3

Essay

A manufacturing company is considering replacing a broken metal cutting machine. Several options have been
proposed.
· Option 1: The broken machine can be sold today for $2,500.
· Option 2: It can be overhauled completely for $8,000, after which it will produce$3,000 in annual cash flows
over the next five years. The resale value of the asset at the end of five years is zero.
· Option 3: It can be replaced for $20,000. The life of the replacement machine is five years, and it has an
estimated salvage value of $3,000 at the end of five years. The anticipated operating cash flows for each year
will be $6,000.
If the firm's required rate of return of 15%, what should the company do?

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Definitions:

Yen Cash Flows

Cash inflows and outflows denominated in Japanese Yen, particularly relevant in financial analyses involving Japanese companies or investments.

Inflation Rate

The pace at which the aggregate price level of commodities and services ascends, reducing the value of money.

Depreciate

A decrease in the value of an asset over time, often due to wear and tear or obsolescence, recognized in accounting to spread the cost of an asset over its useful life.

Canadian Dollar

The official currency of Canada, represented by the symbol CAD or C$.