ABC Boat Company Is Interested in Replacing a Moulding Machine

question 139

Essay

ABC Boat Company is interested in replacing a moulding machine with a new improved model.The old machine has a salvage value of $20,000 now and a predicted salvage value of $4,000 in six years, if rebuilt.If the old machine is kept, it must be rebuilt in one year at a predicted cost of $40,000.The new machine costs $160,000 and has a predicted salvage value of $28,000 at the end of six years.The new machine will generate cash savings of $40,000 for each of the first three years and $20,000 for each year of its remaining six-year life.Ignore income taxes.Required:
What is the net present value of replacing the old machine if the company has a required rate of return of 14 percent?

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