You Are Given the Following Present Value Factors at 8

question 1

Essay

You are given the following present value factors at 8 percent,the Rogers Company's minimum desired rate of return:
$\begin{array}{llr}&\text { Present Value of } \$ 1& \text { Present Value of an }\\ \text {End of Period}&& \text {Annuity of \( \$ 1 \)}\\1 & .926 & .926 \\2 & .857 & 1.783 \\3 & .794 & 2.577 \\4 & .735 & 3.312 \\5 & .681 & 3.993 \\6 & .630 & 4.623\end{array}$
The Rogers Company is considering the replacement of a piece of equipment.The old machine has a carrying value of $800 and a remaining estimated life of five years,with no residual value at that time.Present residual value is $200.The new equipment will cost $1,200,including transportation and installation.It has an estimated life of five years,with no residual value then.Annual cash operating costs are $400 for the old machine and $150 for the new machine.
a. Compute the present value of the operating cash outflows for the old machine.
b. Compute the present value of the operating cash outflows for the new machine.
c. Compute the present value of the cash operating savings if the new machine is purchased.
d. What is the net present value of the replacement alternative?

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Definitions:

Short Run

A period of time during which at least one input of production is fixed, limiting the ability of a firm to adjust its output levels fully.

Product Price

The amount of money required to purchase a specific product or service at a given time.

Minimum Average Total Cost

The lowest point on the average total cost curve, representing the least cost per unit at which a firm can produce any given level of output.

Perfectly Competitive Firm

A firm operating in a market where there are many sellers and buyers, the product is homogeneous, and there are no barriers to entry or exit.