Determine the net present value using total-cost approach

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Reference no: EM13130923

Eastbay Hospital has an auxiliary generator that is used when power failures occur. The generator is worn out and must be either overhauled or replaced with a new generator. The hospital has assembled the following information:

Present
Generator New
Generator
Purchase cost new $ 16,000 $ 20,000
Remaining book value $ 9,000 -
Overhaul needed now $ 8,000 -
Annual cash operating costs $ 12,500 $ 7,500
Salvage value-now $ 4,000 -
Salvage value-eight years from now $ 3,000 $ 6,000

If the company keeps and overhauls its present generator, then the generator will be usable for eight more years. If a new generator is purchased, it will be used for eight years, after which it will be replaced. The new generator would be diesel-powered, resulting in a substantial reduction in annual operating costs, as shown above.
The hospital computes depreciation on a straight-line basis. All equipment purchases are evaluated using a 16% discount rate. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Determine the net present value using the total-cost approach. (Negative amounts should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "tiny_mce_markerquot; sign in your response.)

Net Present Value
Purchase new generator $
Overhaul and keep old generator $

Using the incremental approach, determine the net present value in favor (or against) purchasing the new generator? (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "tiny_mce_markerquot; sign in your response.)

Reference no: EM13130923

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