Treads Corporation Is Considering the Replacement of an Old Machine

question 67

Multiple Choice

Treads Corporation is considering the replacement of an old machine that is currently being used. The old machine is fully depreciated but can be used by the corporation for five more years. If Treads decides to replace the old machine, Picco Company has offered to purchase the old machine for $60,000. The old machine would have no salvage value in five years.
The new machine would be acquired from Hillcrest Industries for $1,000,000 in cash. The new machine has an expected useful life of five years with no salvage value. Due to the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated.
Treads Corporation uses a discount rate of 12%. (Ignore income taxes in this problem.)

- The net present value of the project is closest to which of the following? (Do not round your intermediate calculations.)

• A) $136,400.
• B) $141,500.
• C) $171,000.
• D) $560,000.

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Definitions:

Imperfectly Competitive

Describes markets where individual sellers have some control over the prices due to lack of perfect competition, includes monopolistic competition, oligopoly, and monopoly markets.

Perfectly Competitive Market

A theoretical market structure characterized by many buyers and sellers, free entry and exit, and a homogeneous product, leading to an efficient allocation of resources.

Resource Demand

The need for resources by businesses or the economy to produce goods and services.

Imperfectly Competitive

describes markets where individual sellers have some control over the price of their products due to lack of perfect competition.