You Are Given the Following Present Value Factors at 8

question 31

Essay

You are given the following present value factors at 8 percent, the Rogers Company's minimum desired rate of return:
$\begin{array}{|l|l|l|}\hline \text { Fnd of Period } & \text { Present Value of \$1 } & \text { Present Value of an Aunuity of \$1 } \\\hline 1 & .926 & .926 \\\hline 2 & .857 & 1.783 \\\hline 3 & .794 & 2.577 \\\hline 4 & .735 & 3.312 \\\hline 5 & .681 & 3.993 \\\hline 6 & .630 & 4.623 \\\hline\end{array}$ 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:

Investment Value

The worth of an asset or security based on its potential to generate income, appreciation, or other benefits to an investor.

December

The twelfth and final month of the year in the Gregorian calendar.

Interest

A charge for borrowed money, generally a percentage of the borrowed amount.

Months

Units of time, each roughly corresponding to one cycle of the moon’s phases, used in planning and scheduling.