ABC Boat Company Is Interested in Replacing a Moulding Machine

question 49

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 purchasing the new machine if the company has a required rate of return of 14 percent?

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Definitions:

Population

The total number of people inhabiting a specific area or region.

Generation

A group of individuals born and living around the same time, sharing similar cultural experiences or characteristics.

Present Value

Present value is the current value of a future sum of money or stream of cash flows given a specified rate of return, reflecting the time value of money.

Future Value

The value of an investment or cash flow at a specified future date, calculated by applying expected rates of return or interest rates.