Grey Is Considering the Replacement of Some Machinery That Has

question 55

Essay

Grey is considering the replacement of some machinery that has zero book value and a current market value of $2,800. One possible alternative is to invest in new machinery that costs $30,000. The new equipment has a four-year service life and an estimated salvage value of $3,500, will produce annual cash operating savings of $9,400, and will require a $2,200 overhaul in year 3. The company uses straight-line depreciation.
Required:
Prepare a net-present-value analysis of Grey's replacement decision, assuming an 8% hurdle rate and no income taxes. Should the machinery be acquired? Note: Round calculations to the nearest dollar.

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Definitions:

Streptococci

A genus of coccus (spherical) bacteria that are often found in chains or pairs and can cause a variety of infections in humans and animals.

Chains

A series of connected links or rings typically made of metal used for fastening, pulling, bearing loads, or restraint.

Strep Throat

An infection caused by Streptococcus bacteria that results in a sore, scratchy throat.

Streptococci

A genus of round-shaped bacteria, some strains of which can cause diseases in humans such as strep throat, rheumatic fever, and other infections.