Reference no: EM132587093

Clean Duds Laundromat has an industrial water softener that enhances the water quality used in its washing machines. The water softener is approaching the end of its useful life and must be either overhauled or replaced. Details of the two alternatives are shown below.

If the company overhauls its current water softener, then it will be usable for eight more years. If, instead, a new water softener is purchased, it will be used for eight years, after which it will be replaced. The new water softener will be considerably more energy efficient, resulting in a substantial reduction in annual operating costs, as shown below:

                                     Current water softener                    New water softener

Purchase cost new            $10,000                                      $13,000

Remaining book value           $6,500                                             -

Overhaul needed now           $5,000                                            -

Annual cash operating costs  $7,000                                    $5,100

Salvage value now               $2,400                                           -

Salvage value eight years from now $1,200                            $3,400

• Clean Duds computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 15% discount rate.

Required:

(Ignore income taxes.)

Question 1: Determine the present value of net cash flows using the total-cost approach. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Enter any cash outflows with a minus sign. Do not round intermediate calculations and round final answers to the nearest dollar amount.)

• Pv of net cash flow
• Purchase the new softener $?
• upgrade and keep the old softener $?

Question 2: Should Clean Duds Laundromat upgrade the old water softener or purchase the new one?

Question 3: Using the incremental-cost approach, determine the net present value in favor of (or against) purchasing the new water softener? (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and round final answer to the nearest dollar amount.)